Dear Mr. Berko: Why did American Express lose the Costco account? We have 300 shares of American Express that we bought at $64 in 2013 and it hasn't done well since. Our broker of 16 years wants us to sell American Express and use half the money to buy AT&T and the other half to buy T. Rowe Price Diversified Small Cap Growth. He reads your column and because we are kind of sitting on the fence, he told us to write you for advice. He says you will agree with his recommendation. My wife and I would greatly appreciate your input. We're both 57 and hope to retire at 67. We're nervous about the market and the $833,000 that he manages for our retirement plan. We took your advice in 2002 and hired him and we're glad we did. Our life much easier and our account has done pretty well with him. Unfortunately, he's retiring this summer. — PT: Columbus, Ohio
Dear PT: I've known your adviser for 22 years. I didn't like him when we first met and still don't. We have personality conflict, which is probably my fault, though I greatly admire his skills.
Some say the reason American Express (AXP-$53) lost Costco (COST-$148) was terribly stinky and lousy customer service. And during the last dozen months, AXP's share price has fallen 40 percent. Net income for 2015 will be lower than 2014 and may be lower again this year. AXP's results have been hampered by unfavorable currency exchange rates, higher operating expenses and growing labor costs. Management reduced labor costs, dismissing 6 percent of its employees, but made a big boo-boo when it cut many of its customer service employees. In the past when cardholders called, a pleasant voice answered and quickly found a customer service person to field your questions. Today when calling AXP, you're placed on hold, a recorded voice answers by telling you "your call is important" and then puts you on hold and on hold and on hold. Then you're disconnected, and you have call back. That's no bleeding way to run a credit card business. COST shoppers expect better service.
However, many companies striving to offset higher wages and rising perks are also compelled to reduce their labor force. Try finding a salesperson at Macy's. Restaurants have fewer servers (certainly McDonalds). And Schwab takes longer to answer the phone. Auto dealers (especially BMW and Chrysler) have fewer customer service reps. Physicians have fewer office staff and their phones are answered by robots. "Customer care" is an oxymoron at your cable, phone and power companies and even at the IRS. But Big Business knows that consumers will eventually become accustomed to fast, efficient and courteous self-service!
AXP is trading at a reasonable 10 times earnings. It may be a lifetime before AXP returns to the $90s, and the meager 2.2 percent dividend is off-putting. There's little compelling reason to own AXP. I agree with your adviser; there are better fish in the sea and the $17,000 in selling proceeds can find a better home.
The former American Telephone & Telegraph Co. (T-$36.40) is easy to own. Its recent purchase of DirecTV should create significant synergies of several billion dollars in a few years. T has a stable business, a strong balance sheet, a long record of annual dividend increases, improving earnings and a strong cash flow. Include a 5.3 percent yield, and AT&T is a swell growth and income investment that should hold up well in choppy markets.
T.Rowe Price Diversified Small Cap (PRDSX-$21.76) is a 5-star, $1.9 billion, no-load fund. PRDSX owns strange names like Tyler Technologies, Maximus, Vail Resorts, DexCom, The Middleby Company, SS&C Technologies and Manhattan Associates. Those names and others have enabled PRDSX's shareholders to enjoy annualized one-, three-, five- and 10-year annual returns of 2.3, 16.2 percent, 13.0 percent and 9.3 percent respectively.
Take your broker's advice. A very conservative, low-beta AT&T and an aggressive, high-beta T. Rowe Price fund complement each other. And considering a 10-year horizon, I believe the combined return of T and PRDSX will outperform the market.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] 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.