Coal Stocks Dear Mr. Berko: In January 2012, on your recommendation, I bought 2,000 shares of Synovus Financial at $1.97 a share and made a $2,800 profit, selling them in the summer of the following year at $3.38. I should have held those shares because they …Read more. Dry Bulk Shippers Dear Mr. Berko: I'm 70, and so is my husband, who retired in 2005. We had too much debt and were forced to sell our 2,800-square-foot home in Houston. I also lost my job in 2009. We downsized to a 1,450-square-foot home with a low-interest mortgage …Read more. Big Banks and Good Pizza Dear Mr. Berko: What are your thoughts on buying stock in some of the big "money center banks"? I wanted to buy 1,000 shares of Bank of America when it was selling for $5 a share back in 2011. Unfortunately, I got scared and didn't have enough …Read more. Cars and Loans Dear Mr. Berko: I bought 300 shares of General Motors at $26 over two years ago, even though you said it was a dumb investment. Auto sales have been taking off, and now I'm asking whether you think it would be a good investment to buy 600 shares of …Read more.more articles
Don't Trust Him
Dear Mr. Berko: We bought 25 shares of Lucent Technologies Capital Trust, a 7.75 percent cumulative convertible preferred trust, at $542 a share, which you recommended last August. You said that it was very speculative but that the 14 percent yield was worth it if I could "afford the risk." The $13,550 investment represented 1.2 percent of our portfolio, and we were comfortable with the risk.
We found a new broker last October (he talks about running for Congress), and he didn't like Lucent Technologies. He said the interest payment was doubtful, so we sold it at $566, making a tidy $500 profit. With the proceeds, we bought 2,000 shares of Gabelli Utility Trust at $7.71, yielding 7.8 percent, and reinvested the dividends, which we couldn't do with Lucent. He said Gabelli was safer and had less risk. But it's down to $6.70, and we have a $2,400 loss. Lucent Technologies now trades at $881, and we're sorry we sold it to buy Gabelli Utility. Why is Lucent Technologies doing so well when its parent company, Alcatel-Lucent, is doing so poorly, and why is Gabelli doing so poorly when its generous dividend seems so stable? My broker says Gabelli has no debt, zero leverage and no interest costs. What's wrong here? — TL, Cincinnati
Dear TL: Lucent Technologies (LUTHP-$881) was the mighty and prestigious research arm of American Telephone & Telegraph before the Justice Department dissolved the AT&T monopoly in the mid-1980s, thinking that increased competition would lower telephone rates. Today's telephone costs are higher than ever, and the average family (excluding those millions with free government cell service) pays more than $120 a month for cellphone contracts. Alcatel-Lucent, now LUTHP's parent, is a French company with $20 billion in revenues that sells communications and network technology around the globe. Alcatel-Lucent (ALU-$1.66) has three problems: 1) It's a French company, which is not good. 2) Its earnings are not dependable, and therefore 3) some believe that its survival is in doubt.
Gabelli Utility Trust (GUT-$6.70) is a closed-end fund trading at a whopping 24 percent premium to net asset value. Few professionals would recommend a CEF at this dangerously high premium. So it's safe to assume this goof was born on one of those days when the Lord's Parts Department was suffering severe brain shortages and resultantly has a room temperature IQ. He shouldn't be allowed to reproduce. He's dangerous to your wealth and, therefore, eminently qualified to be a member of Congress. And contrary to his analysis, GUT's portfolio is 31 percent leveraged, to the tune of $51 million. But this leverage doesn't represent borrowed funds, because this money derives from GUT's auction market preferred stocks. Every 60 or 90 days, these AMPS mature. So GUT must refinance $51 million at prevailing (auction) rates every few months, and those rates may be higher or lower than previous rates. Recently, these rates have been trending higher, and higher interest costs reduce GUT's payout.
When your brain-dead meathead reviews a financial statement, he should know that preferred stock isn't carried as a debt (though it functions as a debt) and that preferreds pay dividends that are higher than bond interest. And though the GUT common stock dividend has been a steady nickel a month, the dividend slowly will begin its decline like the stock price, which five years ago was more than $10 a share.
A huge 24 percent premium, a declining dividend and rising interest costs suggest GUT must move slowly lower. Meanwhile, GUT's 1.92 percent annual management fee is obscene. Gabelli should be ashamed of himself.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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