Wall Street Week with Louis Rukeyser; 2539; Investing for Income

Iraq. Laurie. For more than a quarter century America's most popular program about the economy people and their money Wall Street Week With Louis Rick geyser is made possible by the Corporation for Public Broadcasting. And by the annual financial support from viewers like you by Prudential Securities with more than 50 600 financial advisers nationwide preventions securities can help you invest your money wisely by A.G. Edwards

serving the investment needs of individuals and businesses from more than 100 years built on a foundation of trust research and commitment to investor success. And by Oppenheimer Funds because sort of investment performance and sound financial planning go hand in hand. Produced Friday March 29. Our panelists are Elizabeth dater brother Deb Murphy and William waters. Tonight's special guest is Bryan S. Rogers portfolio manager t row price Equity Income Fund. Your name and I'm Louis Rukeyser This is Wall Fleet Week. Welcome back. Well this was the week when we finally found out who we really need to straighten out the craziness in the world of money. Clearly it's not a politician. Who do you think created the chaos. And plainly it's not an economist. This year those guys are having enough trouble accurately predicting what will happen yesterday.

No the only person qualified to explain the nuttiness we see all around us must surely be a veterinarian. So this was the week when the entire economic world seemed to be coming down with a severe case of mad cow disease. In Washington there was as you might say utter confusion. Congress and the White House whose most conspicuous accomplishment this year has been blaming each other for a lack of progress. Failed once again to reach agreement on a budget for fiscal 1996 a year that's already half over. So they approve Would you believe it. One more so-called stopgap spending bill to keep the government going for another 26 days. And that's no bull. Even when our noble public servants did seem to be making miniscule headway as in bills allowing the Treasury to avoid further debt limit squabbles through the fall of 1997 or in pioneer in line item veto legislation

the skeptics were out of the corral before the ink was drawn by explaining how there was less there than met the eye. As for the financial markets they ended a quarter marked by cattle stampedes in opposite directions. The bond market notable for the past two years for its remarkable collection of bum steers ran madly south. Terrified by the thought that somebody other than a bond trader might soon be able to find employment. Fears of a reawakening economy gave the bond market its worst quarter in two years with the yield on the 30 year Treasury bond backing up to just below six and three quarters percent. The stock market on the other hand as is appropriate for a stock yard critter had no beef coming. The Dow Jones industrials have scored an impressive nine point two percent advance since New Year's. Their best performance since last year's second quarter. Indeed if there hadn't been a late

sell off today engineered by the computer driven program trading demons in 1996 his first quarter would have been the best three month period for stocks in five years. So which is right. The bond market. Well the stock market. Could it be just may be that they're both a bit mad. Meanwhile back at the economy it was equally difficult to get to the meat of things. The announcements were so mixed that no matter what the report this week from housing to durable goods to consumer confidence both the optimists and the pessimists were able to find something to chew on. The best reading in this quarter for what it's worth is that the economy is neither expiring nor booming but it's still just creeping forward at an agonizingly slow pace that might not be all that bad for interest rates. Later in the year but of course that view might turn out to be tainted hamburger too. We tonight will talk with a guest who success in both the short and long terms. Why

isn't having remained uncommonly uninfected or should that be done counted by the passing madnesses of Wall Street. But first let's see whom we can milk for laughs in the financial game where Bono's vine. The Dow Jones Industrial Average has been eroding since it set its 18th record of the year we can go Monday this week to nearly identical forty four point drop on Wednesday and Friday. Frustrated the rally attempts and the Dow ended the week down forty nine and a half points at fifty five eighty seven point one for the broader indexes all suffered lesser nicks and the American exchange actually finished with a gain that took it to a record. But if you think the economy is sluggish it's a raging bull as compared with our elves who's plus for reading on the next six months hasn't moved a flyspeck in nine weeks. And in a week that was marked by little movement in a number of areas including precious metals and currency that was

at least poetic excitement in the report by the General Accounting Office that the Federal Reserve which has so much to say about everybody else's business doesn't do a very good job of keeping its own books. Ronald McDonald. WHERE ARE YOU WHEN WE NEED YOU. But don't give up all hope. Progress is still being made on some key fronts. Consider the report this week of a new ergonomic toilet seat developed by a Japanese company that reportedly will solve a problem that presumably has been weighing down civilization for centuries. It will keep Bess from readers legs from falling asleep. It doesn't progress truly wonderful if the designer is reported to be flushed with success but at my feet you have resolutely remain one of our bully fellows does the skittishness in the bond market worry you little. Well actually I think the bond market may be positioned to have a little bit of a rally here. I think that we're starting to see it stabilize it's still holding within a range.

So I think on a short term basis things may be a little bit better in the bond market. What would you expect times out one by one. Now you had a 6.7 percent. I think we might get down to oh say six and a half three eighths. And I think that would be a nice move for it. The Federal Reserve this week decided to do nothing. When you think of it the next time around. Well I think we'd all like to think it's going to lower rates but I think that. We may have seen. Well they may not take any action next time around too but I think it a lot. Will the course depend upon what's going on in the economy. What's so good about stocks now. Well you know we've been range bound since the end of January and in that time we've had new highs in volume new highs in the number of issues that are participating in the advance. And we have investor confidence just moderately bullish. So I think that we're probably going to be moving out of the range that we're in to new highs eventually. And I think that the probably

investors are looking more to a strengthening economy and I think that's why the stock market's holding up later in the year I think they think that our industrial stocks will do better. I think it's OK if companies have earnings. Oh I think the great turn now to billboard is however improbably Bill retired today after 38 years with Merrill Lynch the last 12 as head of the international private banking department. We congratulate you on this premature move. Thank you now. Now at last you're free to speak your mind. Tell us what you really think. I think we're going to have a battle in the stock market between whether or not interest rates are reduced versus corporate earnings that are starting to get a little sickly. And whichever comes first I think is going to set the direction for the market for the next six months. The bond market in the stock market going to go in different directions. Yes they could. They did the first quarter. How long can this continue and historically I don't know Lou but I think that there's a lot of room for

reduction of interest rates. I think I think it will happen Bernadette the next go around and we'll get two or three of them before Labor Day. But what I'm concerned about is if it doesn't happen the next go around in corporate earnings reports the surprises are going to be more negative I think than positive I think corporate earnings peaked in the third quarter of last year and that could send the market the market's gotten tired here and there's not much room on the upside unless we get a diminution in interest rates. Where would you put your huge retirement bonus. Well I'm a little bit. I'm holding a little bit of cash in here Lou but I kind of like the SEC because in the capital good stocks I like the chemicals. I like the metals and I like the energy stocks. Anyone in particular. Well I like Alcoa and Phelps Dodge in the metals I like Union Carbide in the chemicals and I like to Weatherford in Terra and noble affiliates in energy. But David what do you like. Well I like the market for the long term but I do think we may have a little rocky time here perhaps going into April because we've had a lot of what's happened also in the first quarter of this year in the stock market

has been new inflows of cash from the mutual fund business and that is somewhat seasonal in nature in that this is a time where people invest their bonuses in their IRAs and therefore own K plans etc.. Do you see a shift in the market preferences now. Yes I think that I think that the market actually where the S&P 500 and the Dow stocks have led I actually believe that for the rest of the year the mid-cap in the small cap area is going to begin to outperform primarily because I think that there is more innovation going on in some of those companies and I think that a lot of the earnings results will be more on a relatively basis relative basis higher. Often that happens when the economy is pretty slow is that what you're expecting. I think the economy is is is going to be slower than people think it's going to be with and I agree with Bill without some stimulation basically. We'll look at that simulation next chance we get it may I guess. I'm not sure that I think it will get at this time I do think it will come in the second half of the Year at the latest.

Well you know in any event panelists It is time now to put on a happy face and answer a few questions from our viewers. Right at my feet John Prescott of Patton Maine is a new viewer who says he has been watching this ever since his father in law whom he describes as a religious viewer correctly advised him that this was and I quote the fastest half hour on television. What a wise father. No you have to have hope you will now be sure to follow His guidance in all things. John's question is this. There's been a lot of attention given to dividend reinvestment programs in the media recently. What are the positives and negatives of these programs and do you recommend them for beginning investors. John the dividend reinvestment program does have a negative in that you don't receive the dividends directly and you have to pay the taxes on it. But there are positives. It's a forced savings program. And as those dividends accumulate you become the owner of more shares of stock and you don't have to pay a brokerage commission on it. It's a particularly good program for a younger investor who can accumulate a

portfolio and is not dependent upon dividend income but actually it's really a bargain for investors of all ages. And certainly John the DRP is often referred to as a drip. But don't take it personally. Stillwater is a number of you is wonder whether the stock market is really going up simply because the baby boomers are starting to save for retirement. And if this means that the market will then go down when the baby boomers retire. So for the benefit of Harry Brown of Park Forest Illinois Curt Hampton of Boulder Colorado and some others would you tell us whether you think we're heading for that big fall in the early 21st century. Lou the generation of baby boomers were basically born post war one thousand nine hundred sixty one thousand sixty four. So that makes the average baby boomer 41 years old now. So here she has twenty four years to retirement. And yes they are buying financial assets to prepare for retirement instead of consumer durables. But the first baby boomers don't start taking it out till 2011 and then it'll stretch

out over the whole generation of 18 years so our viewers will have plenty of time to liquidate quietly and safely. When that happens I don't think there'll be a cliff that has fallen off and conceivably something good might happen between them that let's hope so. The best data how would you respond to Bertram Weil Jr. of Tuckahoe New York who writes as follows. I note and Associated Press headline reading as follows. New job survey rates funeral business number one. Is there any way an investor can capitalize on this situation. Are there any publicly held companies in the funeral business. Yes Lou there are this is a very interesting industry it's not cyclical it's recession resistant it has some favorable demographics. And basically it's undergoing a quiet revolution there's a huge amount of consolidation going on. Only 16 percent of this business today is with consolidated operators and we expect that to move to about 40 percent in the next five years. There are a number of names among the funeral operators basically has Service Corp. You have low end group and you have Arbor memorial

among the cemetery managers. You have Stewart industries and you have Hillenbrand for caskets for cremation your urns excuse me and also for insurance policies funeral insurance policies. Quiet Revolution. OK now if you're dying to make a profit we'll try to help your finances rest in peace. So bury your fears and shovel your questions to our death and taxes bureau here at Wall Street Week Owings Mills Maryland 2 1 1 1 7. I fax them to us a 4 1 0 5 8 1 0 9 8 0. And if you don't remember friend it's your funeral. Now before we meet tonight's special guest let's take a look at the explosion of mutual funds into so many different categories that a baffled investor might well ask with Shakespeare. What's in a name. Most people when they start investing in stock funds think of one in the growth category. These are funds that try to invest in companies whose earnings growth will be above average. A separate category is aggressive growth. And

these funds often go for broke by buying small or otherwise riskier stocks. Investors with a more conservative bent may be drawn to a Growth and Income Fund which at least in theory will give approximately equal weight to each of those two objectives within this category some funds like my guess advertise themselves as equity income which means they are supposed to invest most of their assets in dividend paying stocks. The permutations are endless and some other funds and the growth in income or balanced area prefer to describe themselves as blended which typically means that they hold bonds as well as stocks and cash. Then there are enough subtle variations to fill another huge tome in the international area where funds further subdivided into some that invest only in a specific region or country. Incidentally if an international fund also invests in the US it thereby enters an entirely new category global and before we even

exit the stock area and get into the endless variety of taxable and tax free bond funds you have that burgeoning area known as specialty in which a fun typically will buy stocks only in one specific industry group. Since many funds pretend to be in one popular category such as growth and income but actually behave quite differently in their investments you often can't really tell the players even with a program. Or getting back to Shakespeare as that eminent financial expert Julius Caesar might have said if he had invested in such a deceptively classified fund in ancient Rome it to BIRTHDAY. But one highly successful modern manager whose fund has delivered as advertised is my guest tonight. So let's go over now and meet Bryan S. Rogers. Ryan welcome. Very pleased to have you nice to be here Lou. Cautious investors seeking relatively low risk with relatively high yields have now parked more than six billion dollars in the no load mutual fund run by Brian Rogers

T Rowe Price equity income. And no wonder its 10 year annualized return of more than 15 percent is the best of any equity income fund. Brian play is tough on and off the job when not running equity income or his other fund he will price value. He often can be found burning calories at a step aerobics class or coaching kids including his own son and daughter in basketball. Judging from his investment style he's probably especially good at defense. Brian what are the key tests you use in picking stocks for your equity income fund. Well Lou we're most interested in companies whose yields are higher than the market and whose price earnings ratios are lower than the market. Oftentimes these are companies who haven't done well in the marketplace we think they're undervalued and we think they offer some combination of income and capital appreciation. It's a cliche by now that the dividend yield is that historic low how much above say the S&P 500 you told us before. Well the S&P currently about 2.2 percent. And currently we're looking at companies with yields

in the 3 percent range and higher. We try to have a 25 percent yield premium and that would put us shooting for companies with about a two point eighty two point nine percent yield as a minimum. Could you give us the same arithmetic on the price earnings ratios and on the price earnings ratio side the P E on the market is about 16 or 17 times right now. And the perfect company to us as a P E of 11 12 or 13 times earnings as you suggest the kind of stocks you find generally stocks that are out of favor with the market in general. How do you make sure you don't just have a collection of stinkers. Well we diversify Louis as much as anything and we we invest primarily in larger cap companies. These are household name companies they tend to be very strong financially. And again I think diversification is important because oftentimes we never know where our performance is going to be coming from. Undiversified for us for a minute and tell us at current prices where you're finding value now. Well we have a number of investments in the financial sector. We have a number investments in some of the telephone stocks a number of investments in some of the cyclicals Well give us some names into those areas.

For example in the financial sector we have investments in companies like Fleet financial a very high quality New England bank. American general a life annuity company. In the utility sector the telephone sector I like Bell Canada which is much cheaper than any of the U.S. companies. Bell Atlantic so very high quality company. And in the cyclical sector of things like DuPont Hubbell a liberal union camp. The companies of that nature look very attractive to us. Is this based on some estimate as to how the economy's going to do. Not really Lou we never have real strong feelings about how the economy's going to do what we do is we try to respond to value up valuation opportunities that we see and make investments accordingly. We never really go in with a real strongly held and economic conviction. Unlike the stock you pick our panel tonight is done pretty well in the short run. So let's start with Brenda Murphy Brian and the other two were let you use is cash flow. What is cash flow and why is it important to the cash flow is really

the cash generated by company's operations it includes not only earnings but also depreciation that's added back in amortization if any. Oftentimes it's really what a company can put in the bank not just what they report on an income statement so low price to cash flow ratios are important to us. A number of funds like yours are heavily weighted in real estate investment trust because of their relatively high yields. How do you feel about rates and do you have any names that you favor in the industry. Well reach Bill are an interesting group there was a very interesting transaction this week we found ourselves on both sides of this and that was the sum of properties to Bartle the merger and to me that's a very interesting company. It has a yield in excess of a treasury bond and looks and looks very attractive to us a new company will because Simon DeBartolo. Of that sector's been under pressure but some of the BARDA looks very attractive to us it has a roughly an 8 percent yield. Brian because of all the share repurchases a lot of companies have significantly lowered their dividend payouts over the last several years. Would you expect to see a time when those dividend

payouts would then increase because consumers and investors are looking for more yield from their equity investments. When we look at investment we really look forward not only the current dividend payout. We're also looking at what the growth in dividend might be and from time to time we factor in the impact of a stock buyback. You can win a couple different ways with this obviously. And I think the dividend increases continue to be important to companies. It's just really a matter of the magnitude involved and really a company that buys back stock to us is as attractive as a company with a steady and growing dividend. Brian I've mentioned that your fund has done well in both the long and short term picking companies that in the short run and not doing so well. When do you sell a company. Well you're correct there is a contrarian element to what we do. We sell a company more often than not when its yield declines to a market yield or below or when we think there's some secular problem affecting a company that can't be straightened out. So it's really a combination of valuation and fundamental concerns. Who should buy a fund like yours and who shouldn't. Well

our fund and funds like ours are appropriate for really conservative investors. Again these aren't aggressive funds as you alluded to earlier. These are funds for investors who may be afraid of the market who want some exposure who don't want to be too aggressive. They're really all weather funds designed for the for the conservative investor. How long do you typically hold on to a stock a Lou over the last 10 years we've had turnover in about the 30 percent range. So that works out to roughly a 3 year holding period on average and in the end the valuation parameter is used on getting in that use and getting out in other words if the stock's price earnings ratio goes above that of the market we're selling more often than not we try to be consistent both on the on the entry and the exit. Aren't you sometimes tempted to say gee this one's doing pretty well maybe we ought to stay with one every day. I mean we try to be as consistent as we can both on the on the buy on the sell side. You don't stay fully invested with your fund so you do do a little bit of timing in that respect don't you.

From time to time we invest in convertibles or some high yield instruments pursuant to the Bond discussion we've invested a small amount of money in the fixed income market this week. We're roughly 82 percent in equities today and the remaining 18 percent on a variety of other instruments. How does that compare with your usual but it's about average. Quite frankly and by buying bonds it suggests that you think we're going to have a reasonably sluggish economy even though you say you avoid that kind of analysis. Well I think more than anything else we're just keying off of the weakness in the bond market in the the very emotional sell off we've seen in the first part of the year. And though it your tween the bond market the same way you treat a stock that is out of favor now and therefore may be of value. Now that's correct. What do you in your own investment act with equal conservatism with you sometimes take a flutter i.e. invest relatively conservatively myself who are probably my most aggressive investment as the common stock of price which is volatile from time to time but most of my money and the money of my of my children is in the equity income fund. There's a man who practices what he preaches thanks very much Brian Rogers. Thanks to our panelists.

I hope you'll be with us again next week. Then I'm going to be discussing defense with one of A Few Good Men. My guess will be Peter as a reader as a former Marine captain who has combined practical military experience with nearly 15 years in Wall Street to gain recognition as a top analyst of the defense industry. Semper Fi. Meanwhile this has been Wall Street Week. I'm with you guys tonight Wall Street Week With Louis. Geyser is a production of Maryland Public Television made possible by the Corporation for Public Broadcasting. And by the annual financial support from viewers like you by Prudential Securities with more than 50 600 financial advisors nationwide credential securities can help you invest your money wisely by A.G. Edwards going beyond stocks and bonds to help you create the right plan for a more secure retirement. A.G. Edwards serving investors for more than 100 years and by Oppenheimer Funds

FICO sort of investment performance at sound financial planning go hand in hand. Wall Street Week With Louis Rukeyser was produced by Maryland Public Television which is Solti responsible for its content. For a printed transcript of this program. Send $5 through transcripts Wall Street Week With Louis Rukeyser Owings Mills Maryland 2 1 1 1 7. Transcripts are also available to subscribers of the Dow Jones news for travel service. News PBS.