Q–A few years ago, I inherited 877 shares of Unicom Corp. Because of problems related to deregulation of electric companies, I’ve been considering selling some or all of them. What does the future hold for this company? I’m 78 years old and have two children.
A–You’re certainly on the money about deregulation concerns.
The nation’s biggest nuclear-power producer had to take big charges to prepare for regulatory change. Unicom suffered a fourth-quarter loss of $1.36 billion when it took an $810 million charge to write down the value of power-generating assets. It also took a net charge of $523 million to write off unrecoverable costs of its Zion nuclear plant.
Furthermore, to comply with the new Illinois electric restructuring law, the public utility recently filed a tariff with Illinois regulators that will cut the power bill of Chicago and four city governmental agencies by an average of 5 percent.
Unicom recently chose John Rowe as its new chairman, president and chief executive officer to spearhead its adaption to deregulation. He was previously president and chief executive officer of New England Electric System and succeeds James O’Connor, who is retiring.
Shares of this utility that provides electricity for one-fifth of Illinois, including Chicago, currently receive a rating midway between a “buy” and a “hold” from Wall Street analysts covering the company, according to the Boston-based First Call Corp. research firm. That’s in line with the overall electric utility industry.
The recommendations include three “strong buys,” two “buys,” five “holds” and five “strong sells.”
“It hasn’t been a pretty picture for electric utilities on the earnings front,” noted Chuck Hill, director of research for First Call. “Industry growth was down 7 percent in 1997 and it’s expected to be up just 1 percent this quarter.”
However, Unicom is expected to have a 21 percent earnings growth rate in 1998, compared to 12 percent industrywide. Next year’s projected 12 percent gain would be double the industrywide gain. Yet its expected five-year median growth rate of 3 percent is 1 percent less than the industry.
Among other concerns, Unicom has lately been in talks about corrective action at its 809-megawatt Commonwealth Edison Quad Cities Unit 1 nuclear power plant, shut down in December when the utility couldn’t answer fully the Nuclear Regulatory Commission’s questions about safe shutdown procedures in the event of a fire. Unit 2, also rated at 809 megawatts, shut down in September for the same reason.
Q–I’m interested in transferring stocks to my son. I purchased the stock several years ago at $35 per share and the current price is about $55 per share. If I transfer less than $10,000 to him, who pays the capital gains tax and how is the tax rate determined?
A–There’s an annual exclusion from gift tax of $10,000 per year per donor for each person to whom you give money, explained Robert Greisman, tax partner with Grant Thornton LLP. The lifetime amount that can be transferred is equal to about $600,000.
If you give away the stock, the child must pay the 20 percent capital gains tax if he sells it. He’ll pay it on the original cost basis of the stock of $35, not the $55 it was worth at the time when he was actually given the shares.
Q–My wife inherited a mutual fund that we know nothing about. Can you tell us about Van Kampen American Capital Harbor Fund?
A–It’s an average performer, mostly because it sticks to large-cap issues and hasn’t been all that opportunistic.
The $493 million Van Kampen American Capital Harbor Fund gained 19.40 percent over the past 12 months and its three-year annualized return was 17.55 percent. Both results rank at about the midpoint of all convertible securities funds.
“This fund invests in such high quality, highly rated companies that it’s limited in its universe, especially when you consider that lower quality convertibles have far outperformed high quality ones in recent years,” observed Tricia Rothschild, associated editor of the Morningstar Mutual Funds investment advisory.
It’s been underweighted in technology and also doesn’t really have that good of a yield, she added.
Convertibles are corporate securities (usually preferred shares or bonds) that are exchangeable for a set number of another instrument (usually common shares) at a prestated price. Most investors in convertible funds seek a combination of the upside of stocks with the downside protection of bonds.
About 84 percent of Van Kampen American Capital Harbor Fund’s portfolio was recently in convertible securities, including Sovereign Banc, Pennzoil, COREStaff, Pier 1, Kmart, Unocal, Houston Industries, Prime Hospitality, Federated Department Stores and Omnicom Group.
The fund’s average credit rating is BBB. Its Class A shares require a 5.75 percent “load” (initial sales charge), its B shares have a declining redemption fee and its C shares have a level load. The minimum initial investment is $500.
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Address inquiries to Andrew Leckey “Successful Investing,” Suite 367, 76 N. Maple Ave., Ridgewood, N.J. 07450 or by e-mail at successinv@aol.com.
