Archive for January, 2010

Annuities for Retirees: What to Consider Before You Invest

Sunday, January 31st, 2010

Annuities can be purchased directly from an insurance company or from other financial institutions (including banks) that act on behalf of the insurance company. In exchange for your investment, the insurer agrees to make periodic payments for a set time period. It’s important to remember that some annuities may lose value. These products are not insured by the FDIC or the FDIC-insured bank or savings institution that may offer them.

There are different types of annuities. A “fixed annuity” provides a fixed payment, often monthly, until the investor dies. It typically guarantees no loss of principal (the amount invested). A “variable annuity” also guarantees payment for a set period, but the payment amounts will fluctuate based on the market performance of the investment option you choose. With a variable annuity, you also risk losing principal as well as earnings, although some variable annuities guarantee the return of your initial investment for an additional fee.

If the income payments are deferred to some later date, the annuity is typically described as a “deferred annuity.” If the payments begin immediately and continue for life, the annuity may be referred to as an “immediate life annuity.”

On the plus side, annuities provide another investment option if you’ve reached your contribution limit on your other retirement accounts, such as 401(k) plans. And, at retirement, the guaranteed payments can provide extra income. But, as with any investment, be aware of the potential pitfalls and make an informed decision.

Know the key features and costs of the product and make sure they fit your needs. Read the literature to understand the most important facts and risks, including the potential for loss, if any.

“A sales representative who talks to you about purchasing an annuity is required by federal law to ask you questions about your investment goals, current finances and future retirement plans,” said Kara Ritchie, an FDIC Policy Analyst who specializes in consumer issues. “If the representative doesn’t discuss whether the product is suitable for your needs and goals, take your business elsewhere.”

Experts generally say that annuities with guaranteed principal and income are more suitable for older investors than annuities that may, through market performance, lose value. The latter include variable-rate, deferred-payment annuities and equity-indexed annuities (those tied to the stock market), which might not make sense for many investors close to or in retirement.

Also, before you sign a contract, make sure you understand the cost of getting your money back early. Many investors with variable annuities are surprised to learn that they must pay hefty “surrender charges” if they try to withdraw money early, cancel their contract, or replace an existing annuity with a new one.

Deal only with a competent, reputable sales representative. Most annuity sales representatives are trained professionals. However, there have been reports of sales representatives who have been poorly informed or have used false or misleading tactics to sell annuities. How can you improve your chances of getting good advice?

Work with a sales representative licensed by your state government’s insurance regulator. If the sales representative offers variable annuities, he or she also must be licensed to sell securities. For information on whether a sales representative is properly licensed or has a history of disciplinary problems, contact your state securities regulator and the National Association of Securities Dealers, a self-regulatory group for the securities industry.

“Annuities are generally sold on a commission basis, so it’s important to find a sales representative who puts your interests ahead of his or her own,” added Ritchie.

Proceed carefully before replacing an existing annuity with a new one. A sales representative may suggest investing in a new annuity paying a higher return or replacing a deferred annuity with an immediate life annuity to provide monthly income now instead of later. These actions may make sense for some people. However, it can be expensive to change annuities. Make sure you consider the contract terms as well as early withdrawal penalties and other charges prior to making a change.

What if, soon after purchasing an annuity, you have “buyer’s remorse” or find another annuity with better terms? Your annuity may have a “free look” period during which you can cancel without penalty. If yours doesn’t and you still want to cancel, determine all the surrender charges and penalties and proceed with caution.

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An Analysis Of Journal Communications (JRN)

Saturday, January 23rd, 2010

Journal Communications (JRN) is comprised of seven essentially separate businesses: The Milwaukee Sentinel, Community Newspapers, Television Stations, Radio Stations, Telecommunications, Printing Services, and Direct Marketing. The companys five reportable segments do not exactly match these seven businesses; however, I believe an investor should analyze JRN on the basis of these seven businesses and their constituent properties, rather than as a single going concern with five reportable business segments. Additional reasons for this belief will be outlined below. For now, it is sufficient to say that if Journal Communications were to divide into seven separate public companies, the combined market value of those companies would be substantially greater than JRNs current enterprise value. Simply put, the sum of the parts would be valued more highly than the whole.

Journal Communications has an enterprise value of just under $1 billion. Pre-tax owners earnings are probably around $125 million. So, JRN trades at eight times pre-tax owners earnings. Thats cheap.

Journals effective tax rate is 40%. That is an unusually high rate. Journals media properties would likely generate more after-tax income under different ownership. The difference would be material; but, for anyone other than a highly leveraged buyer, tax savings would not be a primary consideration. When evaluating Journal as a going concern, it is perfectly appropriate to treat the full 40% tax burden as a reality. These taxes reduce owners earnings by $50 million.

With after-tax owners earnings of $75 million and an enterprise value of $1 billion, Journals owners earnings yield is 7.5%. Remember, this is the after-tax yield. The pre-tax yield is 12.5%. When evaluating a company, its best to use the pre-tax yield for purposes of comparison. Last I checked, the 30 year Treasury bond was yielding 4.63%. So, looking at JRNs current earnings alone, the stock appears to offer a large margin of safety.

This is especially true if you consider the fact that earnings yields offer more protection against inflation than bond yields. They dont offer perfect protection. But, with stocks, there is at least the possibility that nominal cash flows will increase along with inflation. The cash flows generated by bonds are fixed in nominal terms, and therefore offer no protection against inflation.

When evaluating a long-term investment, such as a stock, I do not use a discount rate of less than 8%. This reduces JRNs margin of safety considerably. Instead of being the difference between 12.5% and 4.63%, Journals margin of safety is the difference between 12.5% and 8%. Is such a margin of safety sufficient? Maybe.

When evaluating a prospective investment, I first look at the risk of a catastrophic loss. What is the magnitude? And what is the probability? For my purposes, a catastrophic loss is defined as any permanent loss of principal. The risk that Ive overvalued a business is always greater than my risk of catastrophic loss, because I insist upon a margin of safety. A catastrophic loss is one that wipes out the entire margin of safety.

I can make a bad investment without suffering a catastrophic loss. For instance, most mutual funds are bad investments, because they underperform alternatives. However, mutual funds do not usually carry a high risk of catastrophic loss. In fact, they generally have a low risk of catastrophic loss, because they are highly correlated to the overall market.

Its easiest to understand this concept if you think of valuing companies as being a lot like writing insurance. Even if reality exceeds your expectations in nine out of every ten cases, a terrible misjudgment in the tenth case can cause you great harm. It isnt just how many mistake you make. Its also how big they are.

Some stocks, like Google (GOOG), trade at prices that allow for catastrophic losses of considerable magnitude. Other stocks, like Journal Communications, trade at prices that only allow for very small losses to principal. However, there is also the matter of probability. How likely is it that a Google shareholder will suffer a catastrophic loss? I dont know. Im not even willing to hazard a guess.

In the case of Journal Communications, I am willing to stick my neck out.

I believe an investment in JRN carries a very low risk to principal considerably less than, say, an investment in the S&P 500. Why? Because Journal Communications is trading at a very modest owners earnings multiple. But, that isnt the only reason. You shouldnt look at Journal solely from a going concern perspective. JRN mainly consists of readily saleable properties. The assets backing shares JRN are quite substantial:

Publishing

The Milwaukee Journal Sentinel: Milwaukees only major daily and Sunday newspaper. The Sunday edition has the highest penetration rate (72%) of any Sunday newspaper in the top 50 U.S. markets. The daily edition has the third highest penetration rate (49%) of any daily newspaper in the top 50 U.S. markets. The paper has a daily circulation of 240,000 and a Sunday circulation of 425,000.

The Milwaukee Journal Sentinel also operates three websites. JSOnline.com and OnWisconsin.com generate advertising revenue. PackerInsider.com is a subscription based website.

Over the last three years, both daily circulation and Sunday circulation have decreased by about 1% annually. Full run advertising linage has also fallen by a similar amount; however, after accounting for increases in part run advertising and preprint pieces, it appears there has been no real decrease in total advertising.

The Journal Sentinel generates approximately $230 million in revenue. Advertising accounts for 80% of the Journal Sentinels revenue (the other 20% is circulation revenue). Advertising revenue is somewhat cyclical, and may currently be above normal levels.

Its difficult to value the Journal Sentinel, because JRN places the Journal Sentinel and its community newspapers under one reportable segment. Even if the numbers for the Journal Sentinel were broken out, I would have still have some difficulty coming up with an exact figure, because Im not an expert on newspapers.

Having said that, I cant see how the Journal Sentinel could be worth less than $250 million or more than $500 million. If I had to put a dollar figure on the Journal Sentinel, it would probably be in the 250 $300 million range. Id like to think this is a conservative estimate, but I dont know enough about newspapers to be sure. JRNs failure to break out the numbers for the Journal Sentinel apart from the community newspapers complicates the issue. However, I am quite confident the Journal Sentinel is worth no less than $250 million.

Its even more difficult to value JRNs Journal Community Publishing Group. It consists of 43 community newspapers, 41 shoppers, and 9 niche publications (automotive, boating, etc.). The group generates about $100 million in revenue. I cant value this group apart from the Journal Sentinel, because of the aforementioned lack of disclosure (combining the group with the Journal Sentinel for reporting purposes), my inability to find enough public information on community newspaper businesses, and other such factors.

The best I can do is offer an educated guess as to the combined value of JRNs publishing business. My best guess is that, taken together, the Journal Sentinel and the community newspapers are probably worth somewhere between $300 million and $500 million.

Broadcasting

Journal Communications owns 38 radio stations. The most important of which are: WTMJ-AM Milwaukee, KMXZ-FM Tucson, KFDI-FM Wichita, and KTTS FM Springfield (MO). All four of these stations are number one in their market. JRNs radio stations generate about $80 million in revenue.

Journal Communications owns seven television stations. Almost all of these stations are ranked as one of the top three in their market. Three are NBC affiliates, three are ABC affiliates, and one is a Fox affiliate. JRN owns two stations in Milwaukee, two in Idaho, one in California, one in Michigan, and one in Nevada. Journals TV stations generate about $90 million in revenue.

Again, its too hard for me to value JRNs TV stations and radio stations separately. Taken together, I believe theyre worth somewhere between $250 and $450 million.

Telecommunications

JRN owns a 3,800 mile network in the Great Lakes region. Norlight Telecommunications generates about $150 million in revenue. Im very hesitant to make any attempts to value this division, because I dont understand the telecom business well enough. Having said that, I dont see how it could be worth much less than $350 million.

Miscellaneous

I dont like the printing services and direct marketing business at all. I have no idea how to value them. They do have revenues though; so, they are probably worth something to someone. Revenues from these two businesses exceed $100 million, but they are not very profitable.

Real Estate

JRN owns a surprising amount of unencumbered real estate. For the most part, such properties are closely tied to one of JRNs operating businesses. As long as JRN continues as a going concern, much of the real estate could not be sold. Just to give you some idea of the extent of these properties, it appears JRN owns a little less than two million square feet much of which is in or around Milwaukee. I can not accurately value such real estate. As I said, much of it is closely tied to operating activities. However, buildings in urban areas can sometimes be converted to other uses.

It hardly matters though. Journal Communications is likely to remain a going concern for some time, and as long as it does, it is unlikely to dispose of such assets.

Valuation

So, what is JRN worth? Its hard to say. The current enterprise value is around $1 billion, which is clearly too low. My most conservative estimates for the publishing, broadcasting, and telecom businesses alone add up to $900 million. I think those are very conservative estimates. Using more reasonable estimates, I can not arrive at a value of less than $1.25 billion for JRNs constituent parts. This is true whether I perform an intrinsic value analysis on the entire company, or apply some sort of earnings, sales, or EBITDA multiple to each business separately.

Journal Communications is probably worth somewhere between $1.25 billion and $2 billion. Im quite pessimistic about the newspaper business; therefore, I would lean towards the $1.25 billion figure (which assumes slightly declining revenues). Any sort of revenue growth would dramatically change the valuation. If such growth will occur, JRN is extremely undervalued at these levels. However, Im not sure there will be any growth at all.

Journal Communications voting structure will probably discourage the best course of action: breaking up the company. JRN should spin off the community newspapers, the TV stations, the radio stations, and the telecom business. The printing services and direct marketing businesses should also be disposed of in some way. These are really very different businesses. There are few good reasons for keeping them together, and many good reasons for separating them.

Newspapers, radio, and TV all face different challenges. They need different managers who have complete control over capital allocation and who are compensated based on the performance of their business, not on the performance of a hodge-podge of various media properties. Breaking JRN up will make it easier to manage and will make it easier for current owners to dispose of their shares at more favorable prices should they wish to.

If these businesses traded as five or six different public companies, it is very unlikely their combined market cap would be less than $1 billion. It may not even be necessary for them to be publicly traded. There might be buyers for such properties, if JRNs properties were separated into common sense collections.

But, none of this is likely to happen. Employees control JRN (they maintain control through the ownership of shares with disproportionate voting rights). No one interested in shaking things up will take a stake in this company, because he would be unable to impose his will. I cant imagine management ever embarking on such a sweeping venture without some prodding from the outside.

JRN has almost no downside. Sadly, it doesnt seem to have a lot of upside either. There is a real danger investors will see their returns wither away as the time it takes to realize the value in Journal Communications proves costly. Time is the enemy of the investor who buys this kind of business at this kind of price.

Objectively, I have to admit JRN is undervalued. But, Im not sure its grossly undervalued and I am sure there are better long term investments.

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All About Grants (And No, President Grant Didnt Invent Them!)

Sunday, January 17th, 2010

All About Grants (And No, President Grant Didnt Invent Them!)

Grants are gifts of money that are given to the recipient mostly based on the merit or the need of the recipient. There are many types of grants and all are used for the greater good. Many are given out by the government as aid or as a way to feed a lackluster economy and in so doing raise the tax revenue for the government. One can think of both purposes as investments by the government because in both cases the stability or boost given to the recipient will get them back on their feet and being productive again which is better for the government than that area becoming a perennial drain on the economy.

Governments arent the only institutions that give out grants. Private organizations can give grants out as philanthropic sorts of gifts to the community in which they are located. The great thing about the grant for the recipient is that they are under no obligation to pay back or work off this money. The only requirements come on the front end in the form of eligibility requirements. There is generally a certain list of things that are considered appropriate uses for the money and will not be given out unless the benefactor of the money is sure that they will be used in this way. This whole process is carried out through applications.

People seeking grants will write a grant proposal or fill out an application detailing their eligibility and in many cases making a statement concerning their specific needs. There is often a certain form in which the benefactor expects these to be written, and in lieu of this there are often special positions held by employees of certain types of institutions that are responsible for all of the grant writing in that area.

The most common types of grants are student aid. These grants subsidize the cost of education for students who are either very talented or very needy. The idea is that the institution will only benefit by making a relatively small investment in the students future productivity. Other grants include public educational grants, research grants, product and technology development grants, relief aid grants, small business grants, and on and on. Again dont think of these as free gifts that the government gives out of the generosity in their hearts. Rather this is money that the government is hoping will by helping its recipient on the front end reap major savings and/or profits on the hind end.

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Advantages of Student Debt Consolidation

Wednesday, January 13th, 2010

Student Debt Consolidation refers to consolidating all debts such as outstanding credit card debt, mortgage loans, student loan debt, car loans, etc., into one simple aggregate loan with a lower interest rate and lower monthly loan payments.

StudentDebtConsolidationPrograms.com offers different student debt consolidation options and there are some very flexible student debt consolidation programs available to meet the unique needs of the student. For example, if a student has outstanding unconsolidated student loan debt and is six months from graduation, then they should already be exploring those available options. The right student debt consolidation program can mean substantially lower monthly student debt payments, savings of thousands of dollars every year in total student loan debt balance, and the ease of just having to make one student loan debt payment. There is no cost or obligation to consolidate a student loan, so there is nothing to lose and everything to gain by exploring all student debt consolidation programs and options.

From reducing monthly payments by using Student debt consolidation programs, to repaying student loan debt and improving credit ratings there’s always a way a student can improve their student loan debt finances.

First and foremost, consolidating all outstanding payments into one single sum simplifies the task of managing all their student loans and their payments. Instead of making credit card payments on a number of different credit card loans, students now only have to make a single Student Debt Consolidation payment.

Student debt consolidation leads to a significant reduction in rate of interest. This is especially true in the case of credit card debt consolidation. Most credit card companies command an alarming rate of interest, especially when behind in payments. Going for a student debt consolidation loan is much cheaper because the right student debt consolidation program companies provide a much lower rate of interest than those commanded by credit card companies.

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9 Places You Can Save Money For Your Family

Friday, January 8th, 2010

Most families are spending more and more money every year (and not just because the cost of living rose) while also saving less and less. One reason is that few household managers spend much time reviewing expenses and expenditures to find ways they can save money. However almost every family has places where costs can be cut and pennies can be pinched — and if those freed up funds are then used to pay down debt and save for the future it could have a dramatic impact on their quality of life.

Food is one big area where many families could be more thrifty. Families spend an average of $2,434 on food away from home, according to the Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics. If you (and your spouse and your children) eat lunch out every day of the week then try brown-bagging at least one of those days. If just one of you does it you may save up to $400 a year and if you can double or triple that savings you could finance a family vacation with it.

Another major expense is your home. When was the last time you looked at refinancing? Can you find a lower interest rate? Can you renegotiate to a shorter time frame? Even if you can’t change your mortgage payment you may be able to pay a bit extra each month which over time will help pay down your mortgage faster. Also, don’t overlook your utilities. There are ways to save in this area as well including updating your insulation and weather stripping, keeping up-to-date with maintenance and cleaning of your furnace and air conditioner or using a programmable thermostat to take advantage of those times when your house is empty or the family is asleep.

Transportation is another major expense for many families. Not only are vehicles expensive to buy but also to maintain and operate especially with gasoline prices at such high levels. Is carpooling an option for any members of the family on at least a part-time basis? Make sure to combine errands and trips to cut down on your travel and save money when buying gasoline by taking advantage of special programs and discounts and remaining vigilant about gas prices. In addition, following a regular maintenance schedule and proper tire inflation can also help you achieve maximum gas mileage for your vehicle.

Choosing your bank wisely can be another way to save money. Make sure the bank you use offers free (or at least low cost) checking as well as electronic bill-paying. Electronic bill-paying and a debit card can cut down on your need to use checks and postage which will save you in the long run as well as help you better manage payments so you will avoid fees, penalties, and higher interest rates.

Cutting your credit card costs can be another major savings. This means making sure you are using the best possible credit card with a low interest rate and low or no annual fee. Shop around until you find your perfect match and don’t forget to cancel and cut up those rejected suitors.

Health care is not really an area where you can cut expenses but you can save money by taking advantage of special offers and programs. For example, many employers offer a Flexible Spending Account where you can save money before taxes for out-of-pocket medical expenses for prescription and nonprescription drugs, dental expenses, and eye care.

Tuning up your insurance policies can also help you save money. When did you last compare rates for your home, your vehicles, and yourself? Some other ways to cut costs are to raise your deductible level or using the same company for multiple coverage (your home and vehicles). When you are shopping around make sure to give your current company a shot at keeping you. Sometimes they can offer a better rate too.

Another major expense for many families is the cost of communication including local and long distance phone service, cell phones, cable or satellite television, and Internet access. Review your expenditures and cut out the services you don’t need. Can some of these expenses be bundled to save money? Are there better plans for your needs?

When looking to save money it is important to become an aggressive shopper. The Internet makes it possible today to compare prices and product reviews while not spending a lot of time and money driving from store to store. Any big ticket item (and that includes your weekly groceries, cleaning products and health and beauty aids) deserves a closer study.

Over the next, month take time to review your family expenses and expenditures in each of these nine areas. Making a few alterations in your family’s spending habits will soon make a difference in the overall household budget. You can raise your family’s quality of life by making just a few changes in your monthly budget.

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5 Ways To Save Money On Your Cars Gasoline

Monday, January 4th, 2010

With gasoline prices steadily on the rise, many commuters are finding it more and more difficult to justify spending their hard earned money on the high cost of fuel rather than other necessities, including food and electricity. With that in mind, there are five simple steps that you can take to help stretch your dollar a little bit farther when it comes to your cars fuel consumption.

Carpool. If you have children who are in school, consider sharing the driving responsibility with other mothers that live nearby. This is especially helpful if you can alternate days. Perhaps you would drive the children on Monday and Wednesday, while the other women fill in on the rest of the weekdays. This will save you money on gasoline and will also make the childrens ride to school a lot of fun because they will be riding with friends. The same is true of commuters on their way to work, who can share in the responsibility and costs of driving amongst one another.

Buy a smaller car. If you own an SUV or other large vehicle, your gas mileage per gallon will be less than if you were to own a smaller car. As a general rule, larger vehicles just normally use more gasoline. If you want to save money on the cost of fuel, buying a smaller car is a good start.

Purchase a hybrid car. These cars are fairly new on the market and are still quite expensive, but many find the benefits outweigh the high cost when they figure in their savings on fuel. Hybrid cars usually get better gas mileage per gallon and this results in big savings for the owner.

Turn off the ignition. If you are stuck in traffic that is moving about an inch per minute, then just put the car in park and turn the ignition off. While sitting in traffic, you are just using more and more gasoline and arent really getting anywhere. Rather than waste, try to save money by not leaving your car running in parking lots or your driveway. If you need to stop by the store and will just be gone for a minute, take the time to turn the ignition off. In addition to saving on gasoline, you will be ensuring that your car isnt stolen by turning off the ignition and taking your keys inside the store with you. Many people would be surprised to know how many shoppers actually leave their car running while in the store.

Walk. If you live near a store, walk instead of driving. This will save not only in the price of your cars gasoline, but also in the general everyday wear and tear that your car receives by being out on the road. No to mention, walking is good exercise and is generally safe for most people. So why not walk off some of those pesky winter pounds and save some money on gasoline in the process.

The aforementioned ways are five of the most popular to help you save some extra money where fuel is concerned. Some of the more obvious ways are to stock up when gasoline is decreasing in price. If you get $10 or $15 worth of gasoline every few days, you may get a good price one day and a terrible cost per gallon during the next trip. However, if you fill up your cars gasoline tank while prices are still low, you will be sure to get the best deal possible. Not only that, but you may also end up saving some time at the gas pump when all of the other consumers are waiting in line to fill up before the prices go even higher.

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