Q-I have nine stocks in my long-term growth portfolio. I would like to buy 25 shares of PepsiCo and therefore request your advice.
A-Way back in 1898, Caleb Bradham, a pharmacist in New Bern, N.C., formulated a drink from a cola nut extract and added some vanilla and rare oils. Today’s Pepsi formula is known to only 17 people, 14 of whom are dead. Anyhow, Bradham first called his concoction Brad’s Drink. He sold it over the counter in his pharmacy, and it sold well. Caleb changed the name in 1902 to Pepsi-Cola and sold the syrup from the pharmacy’s back room. The original formula also contained pepsin and was touted as a stomach soother-hence the name, Pepsi.
In 1902, PepsiCo’s (PEP-$30) revenues were slightly over $9,000. Today, PepsiCo’s revenues are over $25 billion, and any company that can grow from $9,000 to $25 billion catches my attention. PepsiCo is a fine company, and I’m comfortable giving you my revocable blood oath that PepsiCo’s share price will quintuple in the coming dozen years. Heck, it more than octupled in the past dozen years.
PepsiCo runs three major businesses: 1) restaurants (Pizza Hut, Kentucky Fried Chicken, Taco Bell and three really neat, upscale theme concepts), accounting for 37 percent of revenues and 29 percent of profits; 2) snack foods (Doritos, Ruffles, Lays plus scores of other obscenely savory epicurean nibbles), earning 28 percent of revenues and 39 percent of profits; and 3) beverages (Pepsi, Diet Pepsi, Mountain Dew, Slice and a multitude of popular allied brands that wet the whistle), generating 35 percent of revenues and 32 percent of profits.
According to chemist Dr. Stewart Schott, many of PepsiCo’s products contain secret ingredients in measured doses designed to encourage repeat sales. The consumer becomes gustatorially dependent (the flavors are irresistible), unable to control his impulse purchases, burgeoning PepsiCo’s revenues and earnings.
Some neuroscientists might postulate that repeated high levels of product consumption could create a genetic predisposition that passes on to succeeding generations. The mandarins of Wall Street recognize the strong properties of PepsiCo products. Accordingly, these saints and sinners argue that PepsiCo’s revenues and earnings will increase 50 percent and 80 percent, respectively, by 1997. They also feel that PepsiCo would be a splendid addition to your growth portfolio.
Q-I’ve enclosed my utility portfolio, which was worth $164,000 in September 1993 and is now worth $134,000. Where are interest rates headed? Should I dump these stocks, hold them or buy more? If you recommend buying more, which positions in my portfolio should I increase?
A-Back in September 1993, Federal Reserve Chairman Alan Greenspan told the world that he might raise interest rates if the U.S. economy continued its robust ways. And it was Black Friday, Feb. 4, when Big Al pulled the trigger.
It was a shot heard across both oceans, crippling the U.S. stock and bond markets, causing hundreds of billions of dollars of losses around the world. And Big Al, with an executioner’s grin, decimated the values of corporate balance sheets and investment portfolios around the world because he “thinks” inflation might be back. And, in the process, the Dow Jones utility averages plummeted, like a black rock from a high peak, a record shattering 30 percent.
In September 1993, utility stocks had yields of 5 percent to 7 percent, and today, less than a year later, those same issues yield 50 percent more. Big Al has an itchy finger, and pundits feel he will pull the trigger once or twice again, dropping the utility average some 15 to 20 points more. But I certainly wouldn’t leave town now. The consensus among interest rate gurus is that Big Al bumbled the ball and that interest rates will begin a downward momentum late this year. In fact, the venerable international investment firm C.J. Lawrence predicts that 30-year Treasuries will fall to 6.2 percent by late 1995.
Sometimes, you gotta go out on a limb because that’s where the fruit is. And in that light, I wouldn’t sell a share of what you own. In fact, I’d consider owning more of the following issues for modest dividend increases and moderate capital gains:
Pacific Gas & Electric (PCG-$24), yielding 8.2 percent; New York State Gas & Electric (NGE-$24), yielding 8.9 percent; Detroit Edison (DTE-$25), yielding 8.1 percent; CIPSCO (CIP-$27), yielding 7.7 percent; Allegheny Power (AYP-$21), yielding 7.7 percent; Atlantic City Energy (ATE-$19), yielding 8.6 percent; and Potomac Electric (POM-$20), yielding 8.3 percent; and two very speculative issues: Puget Sound Power & Light (PSD-$19), yielding 9.5 percent, and Houston Industries (HOU-$34), yielding 9.1 percent.
When was the last time you saw yields like these?
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Malcolm Berko welcomes questions and comments. Write to him at P.O. Box 1416, Boca Raton, Fla. 33429.
