Ask the Fool: Direct and to the points
There are several kinds of points in both the mortgage and financial worlds
Q: Can you explain what "points" are, financially speaking? – T.P., Biloxi, Miss.
A: There are several kinds of points: In the mortgage world, points are fees you can choose to pay to your lender for a lower interest rate. A point is 1% of your loan amount – so, for a $200,000 mortgage, a point is $2,000.
A "basis point," meanwhile, is one one-hundredth of a percentage point, or 0.01%. People sometimes refer to basis points when talking about interest rates or bond yields.
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Stock market indexes are often measured in points rather than dollars, even though they're based on stocks that trade in dollars. For example, the Dow Jones Industrial Average or the S&P 500 might go up (or down) hundreds of points in a day.
Q: I read that Netflix once used a "poison pill" strategy – what's that? – P.B., Greensburg, Pa.
A: In 2012, corporate raider Carl Icahn alarmed Netflix when he bought almost 10% of the company's stock – suggesting that he might have been preparing to push for a leadership change or even a hostile takeover. So Netflix did what many companies have done to avoid being taken over – it instituted a "shareholder rights plan," otherwise known as a poison pill. One variety, when triggered, permits the company to sell shareholders newly issued shares, in order to dilute the potential acquirer's stake.
Poison pill plans are typically triggered whenever some party's ownership stake in a company crosses a certain threshold. These plans can successfully fend off takeovers. But they have risks of their own: Sometimes a takeover isn't a bad thing, and diluting shares can hurt existing shareholders.
PepsiCo's Balance Sheet: If you want to improve your investing, you should learn how to navigate your way around financial statements such as balance sheets.
Some financial statements, such as an income statement, reflect a company's performance over a period of time, such as a quarter or year. But a balance sheet reflects its financial condition at a specific moment – typically the end of a quarter.
Here's a look at PepsiCo's balance sheet, reflecting the end of its last fiscal year in December 2020. There's $8.3 billion in cash and cash equivalents, up from $5.6 billion the previous year. A growing pile of cash is good, but at some point, if a company has more than it can put to good use, it might pay out more in dividends to shareholders.
It's generally best for companies to have little or no debt, but taking on manageable debt – especially when interest rates are very low – can be an effective way to finance operations. Between fiscal 2019 and 2020, PepsiCo's debt jumped from $32 billion to $44 billion. A peek at the notes in PepsiCo's annual report reveals most of its debt at interest rates below 3.5%.
Next up on the balance sheet: Inventory. PepsiCo's rose 25%. Rising inventories can reflect unused production materials and unsold products languishing on shelves. Ideally, inventory growth shouldn't outpace sales (or revenue) growth.
Calculating inventory turnover can be informative, too, as it reflects how many times per year the company sells out its inventory. Take 2020's cost of goods sold (from the income statement) of $31.8 billion and divide it by the average of 2019 and 2020 inventory ($3.8 billion) to arrive at turnover of 8.4. The higher the number the better, and increasing turnover rates are promising. (PepsiCo's turnover rate was 9.4 a year earlier.)
Balance sheets and other financial statements are generally available on a company's website in the "Investors" section. They're included in quarterly earnings and annual reports.
My dumbest investment
Dinar Regrets: My dumbest investment was buying foreign currency – specifically the Iraqi dinar. I know ... stupid. But I also blew $300 on an extravagant dinner once; I would have hated to miss out. In the end, I'm not out much besides my pride. – R.G., online
The Fool responds: We all make financial blunders. With any luck, they won't be major, and we can learn from them and move on without kicking ourselves too much.
Spending money on great experiences, such as an amazing meal or a trip to another country, is generally worth it, as long as you can afford it. Investing in foreign currency can be tricky, though, and it's best to read deeply on it first and to really know what you're doing.
For more than a decade, many Americans, including lots of military personnel, have been persuaded to invest in Iraqi dinars. It has repeatedly been referred to as a scam. The proposition is not unlike that for penny stocks – they're so cheap that you can buy a lot with relatively few dollars, and they're so cheap that they're likely to increase in value. Unfortunately, many investors in the currency have been burned – because Iraq remains a war-torn nation without a thriving economy.
Currency investments can be quite speculative. It's safer to stick with more reliable investments, such as those in solid dividend-paying stocks, or in bonds issued by trustworthy entities.
Name that company: I trace my roots back to 1932, when McGee Airways and Star Air Service began flying in Anchorage. By the late 1940s, I was one of the world's largest charter operators, having bought some former military aircraft. I delivered food in the Berlin Airlift, and transported Yemenite Jews to Israel in 1949. Today, with a market value recently topping $8.5 billion, I'm an international operator; I take more than 44 million customers to more than 115 destinations in four countries annually. I was the first North American airline to sell tickets online. I bought Virgin America in 2016. Who am I?
Last week's trivia answer: I trace my roots back to San Francisco in 2007, a time when hotel rooms were scarce due to a big conference. Two of my co-founders lived there and were broke, so they rented out air mattresses in their apartment to three conference attendees. Today I'm a major force in the hospitality arena, with 4 million people having hosted more than 800 million guests around the world. I went public via an IPO in late 2020 and was recently valued at nearly $109 billion – more than Marriott International, Hilton Worldwide, Hyatt Hotels and InterContinental Hotels Group combined. Who am I? (Answer: Airbnb)
The Motley Fool take
Huge and still growing: Microsoft (Nasdaq: MSFT) – with a market value recently near $2 trillion – is, arguably, one of the safest stocks on the market. It has just about every attractive trait a single stock can possess. Its business is diversified: in this case, across operating systems (Windows), software (Office 365), cloud infrastructure (Azure), social media (LinkedIn) and video gaming (Xbox). Every one of these lines is a growth business, and most generate recurring subscription revenue. Moreover, each of these businesses is highly profitable and requires relatively little capital investment to grow.
In the quarter ending Dec. 31, 2020, Microsoft's revenue accelerated by 17% year over year, while operating income grew by an even more impressive 29%. It also has a terrific balance sheet, with $132 billion in cash against just $60.5 billion in debt. That leaves plenty of cushion against a big downturn in the market – and if one arrives, Microsoft could buy up its own stock at a discount, or make opportunistic acquisitions.
Then there's the dividend: Microsoft's stock recently yielded less than 1%, but that payout has been increased by an annual average of 9% over the past five years, and is likely to keep rising over time. (Teresa Kersten, an employee of Microsoft subsidiary LinkedIn, is a member of The Motley Fool's board of directors. The Motley Fool owns shares of and has recommended Microsoft.)
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