Q: If a company has a lot of sales, might it still be a bad investment? — H.A., Glendale, Calif.
A: It's very possible. Sales (also known as revenue) are what a company takes in for its products and services. But if the company spends more than it takes in, it ends up with losses instead of profits. This all shows up on a company's income statement (sometimes referred to as a "statement of earnings" or "statement of operations," among other things). It starts with sales at the top, and then subtracts costs such as raw materials, payroll, marketing and taxes, eventually arriving at net income, which can be positive (profits) or negative (losses).
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Ideally, a company will have growing revenue and growing profits. But even good companies can have a year or two in the red — perhaps because they're spending heavily on advertising or on growth, or because they're facing a temporary setback. And younger, smaller companies may run many losses in their early years. So unprofitability isn't necessarily a deal-breaker, but it's best to focus your dollars on companies that are reliably profitable.
With any possible investment, study its financial reports: Check whether it's gaining or losing market share, how strong its competitive advantages are, and whether its future seems promising.
Q: Can you recommend any investing guides for beginners? — J.S., Bixby, Okla.
A: Sure. Check out "The Motley Fool Investment Guide" by David and Tom Gardner (Simon & Schuster, $22).
Other good introductions include "Idiot's Guides: Beginning Investing" by Danielle L. Schultz (Alpha, $20), Kathy Kristof's "Investing 101" (Bloomberg Press, $19), and John C. Bogle's "The Little Book of Common Sense Investing: The Only Way To Guarantee Your Fair Share of Stock Market Returns" (Wiley, $25).
Retirement blunders to avoid: If you want your retirement to be as comfy and secure as possible, avoid these mistakes:
Assuming Social Security will be enough: The average monthly retirement benefit was recently $1,523. That's a little more than $18,000 per year, and many people will receive much less than that. To learn how much you can expect from Social Security based on your earnings so far, visit SSA.gov and set up a "my Social Security" account. Then develop a plan to build any additional income you'll need through saving and investing.
Not signing up for Medicare on time: If you're late enrolling in Medicare, you can be slapped with a hefty penalty fee. You're eligible for Medicare at age 65, and you can sign up anytime within the three months leading up to your 65th birthday, during the month of your birthday or within the three months that follow. Visit Medicare.gov for more info.
Failing to take required minimum distributions (RMDs) on time: Owners of traditional IRAs and 401(k)s (though not Roth IRAs) are required to withdraw a minimum amount each year — for new retirees, beginning the year you turn 72 — and missing the deadline can be extremely costly. (RMDs were waived for 2020 due to the pandemic.) For more on RMD rules, visit AARP.com and type "RMD" into the search box there.
Not considering fixed annuities: Variable or indexed annuities can be problematic, with steep fees and restrictive terms, but fixed annuities (immediate or deferred ones) are more straightforward. They offer dependable income for a set period — which can be the rest of your life.
Underestimating the cost of health care: It's been estimated that married retirees will spend hundreds of thousands of dollars out of pocket on health care during their retirement. Aim to keep your costs down by staying healthy and being smart about Medicare, choosing the plan that will serve you best and making the most of all it offers, such as free cancer screenings.
My dumbest investment
Hefty fees: My dumbest investment was buying $150 of stock in Vodafone and paying $18 in fees to buy and sell it. It's hard to beat that as a dumb investment, surely. — D., online
The Fool responds: You've pointed out a common investing mistake that many investors have made, usually unaware. If you pay $18 to buy $150 worth of stock, you're forking over about 12% of the value of the investment just in the trading commission. That's problematic, because you'd have to see your investment increase in value by 12% just to get back to even. The costly error is repeated if you spend another 12% of the investment to sell your shares.
The Motley Fool long ago suggested that investors spend no more than about 2% of any investment on commission fees. Back when trading commissions cost $25 or more, that required trades worth about $1,250 or more. But commissions have fallen sharply over the years, and not too long ago, $7 commissions were common. Those would require a trade valued at just $350 or more in order to stay at 2% or below. But today, many big, respected brokerages feature $0 trades. With that kind of charge, you could go ahead and place a $150 order for free.
Commission fees matter most if you trade frequently, which isn't an ideal way to invest. Learn more about good, low-fee brokerages at our TheAscent.com site.
Name that company: I was founded by Thomas Edison in 1889. My research lab created the tungsten filament in 1908. I developed moldable plastic in 1930 and built the first U.S. jet engine in 1942. My wind-turbine business dates back to my purchase of Enron's wind assets. Today, with a market value recently over $97 billion, I'm a multinational conglomerate, focused primarily on power, renewable energy, aviation and health care. I boast an installed base of more than 7,700 gas turbines, 45,000 onshore wind turbines and 64,000 commercial and military aircraft engines. As 2020 began, I employed around 205,000 people. Who am I?
Last week's trivia answer: My roots go back to the 1890s, when some of my products were launched. I was incorporated in 1919 as Nebraska Consolidated Mills. Today, based in Chicago, I'm a giant in the food business, with brands including Banquet, Bertolli, Birds Eye, Chef Boyardee, Duncan Hines, Egg Beaters, Healthy Choice, Jiffy Pop, Marie Callender's, Reddi-wip, Slim Jim, Vlasic and Wish-Bone, as well as emerging brands such as Angie's Boomchickapop, Frontera and Udi's. (Some brands I've sold include Wesson, Butterball and Armour.) I employ roughly 18,000 people in about 50 locations, and I rake in more than $11 billion annually. Who am I? (Answer: Conagra Brands.)
The Motley Fool take
Pharma Perks -- and more: AbbVie (NYSE: ABBV) is one of the least expensive big pharmaceutical stocks on the market, with promising growth prospects.
It has grown rapidly in recent years thanks largely to Humira, its key immunosuppressive drug — which is facing the expiration of its patent protection beginning in 2023. Not surprisingly, emerging competition from biosimilar products has made investors jittery, but AbbVie is prepping for a life beyond Humira. To start, its Rinvoq and Skyrizi drugs are in late-stage regulatory review and on track for faster launches than previously planned. AbbVie projects the two drugs could bring in revenue of more than $15 billion by 2025. The company has several other growth drivers as well, including blood cancer drugs Imbruvica and Venclexta, plus antipsychotic drug Vraylar.
AbbVie's recent acquisition of Allergan, which added Botox and neurological drugs to its portfolio, should also drive growth. Allergan generated $16.1 billion in revenue in 2019. For the full year 2020, AbbVie projects Allergan to add 12% to its adjusted earnings per share.
Meanwhile, management is targeting a reduction in debt of between $15 billion and $18 billion by the end of 2021. That should help AbbVie keep increasing dividends, which recently yielded 4.7%.
With improving growth prospects, a fat dividend and a bargain valuation, AbbVie deserves consideration.
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