Question:
I was looking at my portfolio, and it seems I still have a few shares of Phillips 66 from when it spun off from ConocoPhillips. The position is around $7,500. Is this worth keeping, or should I take my gains and run? Also, are these considered long-term gains, if it’s from a spinoff, and I held the original company for more than a year?
Answer:
First, your cost basis in the original company should carry over to spinoff shares. If you’ve held the original company for more than a year, you should have long-term gains if you sold the spinoff at a profit.
We recommend holding Phillips 66 (NYSE: PSX). It was spun off from a strong parent company, ConocoPhillips (NYSE: COP). It is the refineries, natural gas and pipelines part of the business. Normally, we do not recommend refineries, but currently there is a shortage of them, and this company appears to have some good momentum. Natural gas is at a low, considering the abundant supply. However, Phillips 66 has pipelines, and part of the issue with natural gas is the ability to transport it.
Again, normally, we do not recommend spinoffs, as usually there is no information on the company to provide a valuation judgment. Given that this company came from ConocoPhillips, and the segment had two years of good information, we recommend holding it, since you already own it.
Question:
My broker recommended I sell Philip Morris and Lorillard. Any feelings on whether or not I should hang on to these two? I’ve held both about two years.
Answer:
We see no reason to sell either. These are both considered defensive stocks, and have done well recently. Lorillard, Inc. (NYSE: LO) has a very low beta, about 0.5–0.6, and a high dividend yield, about 5.29%. All of Lorillard’s sales exposure is in the United States, as it sold its ownership rights to international distribution in 1977. The company owns the top menthol brand cigarette, and the No. 2 overall brand in the United States in Newport cigarettes, which has grown faster than traditional cigarettes and consistently gained market share. The company also has ownership of the best-selling electronic cigarette, giving it exposure to a “healthier” and faster-growing cigarette segment. The company’s average three-year revenue growth has been 8.4%. However, tobacco seems to be an aging industry with falling volumes.
Unfortunately, the FDA is currently reviewing the health risks of menthol cigarettes. With an unfavorable ruling from the FDA, Lorillard’s business could be significantly impacted, as Newport accounts for nearly 90% of sales. The company’s margins have steadily declined over the last few years.
Philip Morris International (NYSE: PM) also has a low beta, around 0.75, good dividend yield at 3.9%, and consistent margins. The company is the world’s largest manufacturer.
While volumes are declining in many, if not most, developed markets, emerging markets and their faster growing populations and standards of living can likely offset those lost sales. As its name implies, Philip Morris has no U.S. exposure, only international, with more than a third of its sales in the European Union. Shares have returned more than 30% in the last year, but the company is also the highest-priced tobacco stock, with a price to earnings ratio of 17.8 and a price to sales ratio of 4.9.
Question:
My daughter has recently graduated from professional school, and has joined me in my practice. She has approximately $100,000 in student loans. She is not yet an owner or partner in my practice, but is there any way that some or all of the student loan costs can be paid with pretax dollars? She is also getting married in 2013.
Answer:
Unfortunately, there is no current plan in place that allows student loans to be paid off with pretax dollars. There may be an option for her to consolidate her loans (depending on the type of loans) into one fixed monthly payment and spread it out over a 30-year time period. This method would cost her substantially more in interest if she didn’t pay it off prior to 30 years. However, it would provide her with a much lower monthly payment while she is starting her career and marriage. She could simply pay more than the minimum amount when she is able.
Please note that she may be able to take the student loan interest deduction on her tax return for a portion of the interest paid on qualified student loans. This is dependent on the level of her income and future husband’s income if they will file joint returns.
Currently, she can claim a maximum $2,500 deduction of student loan interest if:
- She paid interest on a qualified student loan in tax year 2012;
- She is legally obligated to pay interest on a qualified student loan;
- Her filing status is not married filing separately, and
- Her modified adjusted gross income (MAGI) is less than a specified amount, which is set annually.
For 2012:
- For married filing jointly the amount is $120,000. (Phased out between $125,000 and $150,000), and
- The MAGI amount is $60,000 for all other filing statuses. (Phased out between $60,000 and $75,000).
- Additionally, the deduction cannot be claimed if the taxpayer—single or married filing joint—can be claimed as a dependent on someone else’s return.
Question:
I’m looking at either Parker Hannifin or Dover. Do you have any preference?
Answer:
Both companies are in the industrials sector, Dover Corp. (NYSE: DOV) manufactures material handling equipment, truck bodies, commercial trailers and refrigeration system,s while Parker Hannifin Corp. (NYSE: PH) manufactures hydraulic equipment. Of the two companies, Parker Hannifin has been the better performer of the two companies year to date.
Looking at the fundamentals, Dover is the least expensive according to price to book ratio and dividend yield. However, according to price to earnings, price to sales and enterprise value and earnings before interest, taxes, depreciation and amortization, Parker Hannifin outshines Dover. Parker Hannifin also has the lower leverage of the two and higher investment return ratios. Nevertheless, Dover is expected to grow earnings by 14.33% in the next three to five years, compared to Parker Hannifin‘s 6% growth expectation. Combine that with the price to earnings and we get a price/earnings to growth ratio of 0.88 for Dover, and 1.86 for Parker Hannifin. This decision is not a clear-cut as is generally the case with equity investing. Given the evidence at hand, however, we prefer Dover.
Consider that both companies are in the same sector and thereby subjected to the cyclicality that comes with Industrials–that is they are highly correlated to the economic cycle. They should lead the stock market in recovery and decline significantly when the economy slows.
Question:
I bought HB Fuller around $19. Is this worth holding thru next year? If I sell now, I may be able to offset the gains.
Answer:
HB Fuller, Co., (NYSE: FUL) is a good company, although perhaps not as high quality as E I Du Pont De Nemours and Co (NYSE: DD). Then again, they do not have the same legacy issues as Du Pont. HB Fuller is a specialty chemical and adhesives maker, and has the potential to do well as housing recovers. We recommend holding HB Fuller. The company also has a growing dividend.
Question:
With a name like Smuckers…it’s gotta be good, right? Buy, sell or hold?
Answer:
Priced at 20x earnings, we do not recommend buying The J. M. Smucker Company (NYSE:SJM). While it is an A-rated company, we find it expensive and not growing very fast.
At Henssler Financial we believe you should Live Ready, which includes understanding your investments. If you have questions regarding your holdings, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
