Dear Mr. Berko: My broker wants me to sell my 2,094 shares of Walmart and use $8,000 of the money to take what he calls a “businessman's risk” and buy 2,000 shares of Tower Group International, which would pay a 66-cent dividend yielding 17 percent, at $3.89. His insurance agent represents Tower, which insists that management has no intention to cut the dividend because the company has plenty of cash. What do you think? My broker says Walmart's growth will stop dead if it pays employees $15 an hour, which he says would increase its labor costs by 35 percent. He says a $15 hourly wage would ruin Walmart and wants me to put that money in an indexed annuity. Your advice, please.
RJ, Wilmington, N.C.
Dear RJ: I liked your broker until he recommended an indexed annuity, a product that is the cause of more complaints than you can wiggle your toes at. Yeech! Indexed annuities, as a wise uncle Remus might say, “are like walkin' barefoot tru da briar patch.”
But if you can chew bottle glass, complete 50 pushups on a bed of nails, bathe in molten lava and then head-butt a unicorn, you might consider owning Tower Group International (TWGP-$2.90), a property and casualty insurance products and insurance services firm with $1.4 billion in revenues. TWGP is home-ported in Bermuda, a delightfully British territory with exceptional banking laws.
TWGP was trading at $22 last August, when management reported losses exceeding $12 a share, or more than $500 million. Resulting doubts about the adequacy of its loss reserves collapsed the stock 18 points in the following months.
Still, TWGP has a $10.09 book value, including $2.12 a share in cash, and is rumored to be able to return to profitability this year. So some observers feel the 66-cent dividend (totaling about $38 million), yielding a blinding 17.3 percent, won't be cut.
However, Mike Lee — the chairman, CEO and president — sold more than 1.2 million shares last September between $10 and $12 a share.
So I'd call TWGP a flaming rank speculation rather than a “businessman's risk.” Meanwhile, an insurance mogul I know at Travelers, one of the large companies with which TWGP coordinates its business, agrees. If you can afford the risk, risk it!
I didn't care for Walmart (WMT-$78) a dozen years ago, when revenues were $248 billion, earnings were $1.80 a share, book value was $8.95, the dividend was 30 cents and the stock was $64. This year, revenues may reach $497 billion, and earnings should increase to $5.65. The book value could be $28, and the dividend may be raised to $2.10. But the stock still is trading at a middling $78.