Risky yields, and why not to like Sara Lee
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Dear Mr. Berko:
I have $10,000 to invest and would like to buy a high-yielding preferred with an 11 percent or better yield that could increase in value as the company improves its earnings. I bought the 7.75 percent Lucent convertible bonds you recommended at $660 per bond with an 11.7 percent yield, and I’d like to buy another high-yield security. What do you recommend? Also, I own 600 shares of Sara Lee, which I bought in 1999 at $27. It’s done nothing but go down. Please tell me what you think.
W.T., Springfield, Ill.
Dear W.T.:
Yep, your Lucent Technologies convertible, now trading at $735, has done well this year. Sometimes we get lucky, which proves the old saw that even a blind hog can find an acorn once in a while. If you are comfortable with another enormous gamble, then squint at the nefarious American International Group Inc.’s 6.45 percent Series A-4 junior subordinated debentures due 6-15-2077 (AFF-$12.09).
The $1.6125 annual interest yields 13.3 percent, a fair yield for a very risky security – even though on June of this year, it was rated BBB by Standard & Poor’s. Considering S&P’s perfidious past, I suspect that rating is suspect.
One might rightly assume, because the Treasury Department has flooded AIG with tens and tens of billions of dollars, that AIG (like Citigroup, Merrill Lynch, etc.) has too much government money invested to fail.
This issue was a $30 million initial public offering in June 2007 and pays interest quarterly on the 15th of March, June, September and December. So a 700-share purchase ($8,400) would, with heaven’s help and enormous good fortune, continue to pay $282.19 a quarter.
According to an old and knowledgeable English friend “Bonny” Bobby Shaftoe III, American International Group could earn a swell profit in 2010.
Sara Lee Corp. (SLE-$11.18) may soon be nominated by the Inter-Galactic Analysts Association as the worst-performing marketer and manufacturer of branded consumer products in the Little Dumbbell Nebula. The company has oodles of recognized branded products, most of which are fairly priced, appeal to the palate and are attractively presented. And one would be right to think that, with brands like Kahn’s, Jimmy Dean, Sunbeam, Ball Park, Colonial, Douwe Egberts, Earth Grains, Hillshire Farm and so on, this $13 billion revenue company would be sitting on the throne of the nebula, basking in glory and shareholder adulation. Well, fewer assumptions could be more distant from reality.
In the past 10 years, SLE’s revenues crashed 35 percent, earnings collapsed 34 percent, dividends dropped 10 percent, long-term debt grew 20 percent, return on capital toppled 55 percent and return on equity plunged nearly 80 percent. So, although you paid $27.60 for 600 shares when SLE appeared to be a solid company, the current $11 price truly reflects Wall Street’s very low opinion of this company, a decade of failure plus 10 years of brain-dead management.
I see very little revenue and earnings growth in the coming years, so with alacrity I would recommend that you sell this stock.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. © Copley News Service