Question:
I wanted to check in on one of my favorite stocks: PepsiCo. Is it still in your favor and do you have any target prices for buying more?
Answer:
PepsiCo (NYSE: PEP) reported strong earnings, and is expected to grow 5% to 7% annually over the next three to five years. It boasts a 2.9% dividend yield that is growing at 7% a year. The company has an above market P/E ratio at 20, but the Consumer Staples sector generally trades at a premium to the market because of their stable sales. The company will not experience rapid growth, but 10% is not unlikely. Activist investor Nelson Peltz is calling for a breakup of PepsiCo, but we think his request will go nowhere.
Question:
How much of my salary should I save? Sometimes I feel we “over save.” When does saving cross the line into being too frugal?
Answer:
We believe if you save 10% of what you make over your lifetime, you should be OK in retirement. Ideally, you want to maximize your tax deferred savings, such as your 401(k) and IRA or Roth IRA if you are eligible. Any more you can save should be to a taxable account.
We’ve had retired clients cancel subscriptions to the newspaper because they cannot afford it even though they may have millions in invested assets. What they fail to realize is that once you retire, you are supposed to dip into your principal. You do not have to save 10% of your income in retirement; however, it is hard to break that habit.
You sacrifice during your working years to save for retirement. Your retirement is the time to do the things you gave up in your earlier years. Generally, you cannot save too much as you don’t know what the future holds. Perhaps you will be fortunate enough to get to the point where you realize you cannot spend all the money you’ve saved.
Question:
What is the Alternative Minimum Tax?
Answer:
The alternative minimum tax (AMT) is a separate tax computation that affects only certain taxpayers. The purpose of the AMT is to ensure taxpayers with substantial income will not escape taxation entirely by employing certain exclusions, deductions, and credits. The tax law affords preferential treatment to certain types of income and allows special deductions and credits for some kinds of expenses. Taxpayers who benefit from these tax advantages have to pay at least a minimum amount of tax through an additional tax–the AMT.
You may have to pay the AMT if your taxable income for regular tax purposes, plus certain adjustments, is more than a specified exemption amount. More specifically, tax benefit items, known as adjustments and preferences, are added to your income to arrive at alternative minimum taxable income (AMTI). A special exemption amount is then subtracted from AMTI, and the result is multiplied by the applicable AMT rate. If the AMT calculation results in a higher tax liability than the regular income tax, the difference is reported as an additional tax on Form 1040. While the taxes are reported separately on your return, in effect, you would be liable for the AMT or the regular tax, whichever is higher.
Question:
I’ve heard you talk about both Walgreen and CVS Caremark. Which one do you prefer? I prefer Walgreen, but I can tell you that is totally based on my neighborhood stores. CVS just looks so dated.
Answer:
First, we strongly believe you should not invest based on a familiarity bias. The physical store in your neighborhood has no bearing on the quality of the company and stock.
We have owned both Walgreen Co. (NYSE: WAG) and CVS Caremark (NYSE: CVS). We currently hold CVS. The two stocks are very comparable now, as they both have A+ for financial strength according to Value Line. Both companies have a projected long-term growth rate of 14%, and their dividends are close at 1.4% for CVS and 1.7% for Walgreens.
Walgreens has 18% debt as a result of recent acquisitions. But those acquisitions have placed Walgreens in prime real estate locations in both New York City and Chicago that would make it difficult for CVS to compete.
Still, CVS owns 21% of the market’s share, compared to 19% for Walgreens. CVS’ strategy was to move in across from Walgreens locations as the consumer traffic was already established. CVS bought the benefit management company Caremark, while Walgreens has a deal with Amerisource Bergen. CVS is cheaper, trading at 20x earnings, while Walgreens trades at 23x earnings. We do not believe Walgreens deserves that much of a premium. If you own Walgreens, it is OK to hold, but if you are looking to buy one or the other, we recommend CVS.
Question:
I’m about to get married. Should I adjust the asset allocation in my 401(k) to take my future wife’s investments into account?
Answer:
We believe you should definitely look at your future wife’s accounts; however, you should really ensure you are maximizing both 401(k) plans so you get the employer match and the benefit of the tax deduction. Often we’ll see one spouse deferring 17.5% while the other spouse is not contributing anything to their 401(k) when they both could be receiving an employer match. The employer match is a guaranteed return on your investment. We recommend breaking it up, for example saving 4% to both 401(k) plans so both spouses receive the match.
You may also want to look at the investment options available in both plans. While most plans have good options in all asset classes, you may find one spouse has better international options than the other, while the other has better small-cap funds.
At Henssler Financial, we believe you should Live Ready, and that includes understanding the fundamentals of your investment choices. If you have questions regarding your stock holdings, contact the Experts at Henssler Financial:
- Experts Request Form
- Email:experts@henssler.com
- Phone: 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. 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.
