Q. What do you think the future holds for my shares of Citigroup Inc.? - J.T., via the Internet
A. The world's largest financial-services firm is highly profitable, has a diverse product line, aggressively acquires companies and does business in more than 100 countries.
All of that, however, also subjects it to the vagaries of global economies, financial markets, interest rates and credit quality. In addition, it is paying a high price for past financial ties to scandalous companies.
Shares of Citigroup (C) are down 10 percent this year, following last year's 1 percent decline. Recent quarterly profits were less than expected because rising interest rates hurt its bond trading and bankruptcies trimmed credit card results.
There is ongoing commotion in the top ranks.
Chairman Sanford Weill, 72, recently said he'll stay on until April, squelching reports that he'd leave earlier to start a private equity fund. The possibility of dealmaker Weill becoming a competitor had unsettled the company and investors. Negotiations for his earlier retirement bogged down when the board vetoed perks such as a corporate jet and security detail.
Meanwhile, President and Chief Operating Officer Robert Willumstad is leaving to seek the top post at another company. Willumstad was named chief operating officer as consolation prize when Charles Prince became chief executive in 2003. Also exiting is Marge Magner, global consumer banking head and one of the nation's highest-ranking female bankers.
Top boss Prince is thinking long term, cutting loose less-profitable units and emphasizing internal controls as he tries to rid Citigroup of lingering ethical and regulatory problems.
Citigroup is partnering with three other financial-services firms and the Boston Stock Exchange to launch an electronic stock exchange in 2006 called the Boston Equities Exchange. It has invested $3.75 million for a 5 percent stake in the Philadelphia Stock Exchange.
Bank acquisitions in Asia, Latin America and Eastern Europe are planned.
The consensus analyst recommendation on Citigroup shares is a "buy," according to Thomson Financial, consisting of five "strong buys," 11 "buys" and five "holds."
Citigroup will pay $2 billion to settle a class-action lawsuit over its role in Enron Corp.'s accounting fraud. It agreed to pay WorldCom Inc. investors $2.6 billion last year. It is shelling out $208 million to settle fraud charges against an affiliated transfer agent for Smith Barney mutual funds and paying $25 million in fines for improper British bond trading.
Earnings are projected to increase two-tenths of a percent this year, versus 6 percent expected for the money center bank group. Next year's expected increase of 9 percent is in line with industrywide forecasts. The projected five-year annualized growth rate for the company of 11 percent compares to 10 percent forecast industrywide.
Q. I'm very concerned about my shares of Fannie Mae. What are the prospects? - C.J., via the Internet
A. The largest U.S. buyer of home mortgages is trying to get its house in order.
To accomplish this, it must overcome its recent scandalous history of allegations of shoddy accounting and earnings manipulation, unbridled growth and ousted management.
Shares of Fannie Mae (FNM) are down 28 percent this year, following last year's 2 percent decline. Fannie Mae is in the business of buying mortgage loans from banks, packaging them into securities and selling them into the market.
Regulators ordered this government-sponsored company to restate its earnings back to 2001, a correction that could run as high as $11 billion. It recently said it won't release 2004 financials until the second half of 2006.
As it works toward a government-imposed Sept. 30 deadline to increase its capital reserves by 30 percent, Fannie Mae is reducing its mortgage loan portfolio and raising new capital through issuance of $5 billion in stock.
Federal Reserve Chairman Alan Greenspan has testified before Congress that Fannie Mae's acquisition of mortgage securities for its own portfolio adds "significant risk to the American financial system." Proposed legislation in Congress would overhaul the housing agency regulation governing Fannie Mae and Freddie Mac, as well as reduce their mortgage portfolios.
Change has begun. After accounting problems came to light, Fannie Mae Chairman and Chief Executive Franklin Raines was forced into retirement and Chief Financial Officer Timothy Howard resigned.
Daniel Mudd has been upgraded from interim status to Fannie Mae President and CEO. He was president and CEO of GE Capital, Japan, before joining Fannie Mae. Experienced outside executive S. Jean Hinrichs was named senior vice president for internal audit.
Even though its accounting records remain a quagmire and looming legislation seems likely to reduce its autonomy to some degree, Fannie Mae nonetheless performs a crucial financial function in the important housing market. So while opinions are mixed, most investment analysts don't expect it to be dismantled.
Based on its reduced stock price, stock of Fannie Mae receives a consensus "buy" rating from analysts who track it, according to Thomson Financial. That consists of two "strong buys," 10 "buys," six "holds," one "sell" and one "strong sell."
Fannie Mae earnings are expected to decline 10 percent this year, versus an 11 percent increase projected for the credit services industry. A decline of 1 percent is forecast for next year compared to a 9 percent increase expected industrywide. The projected five-year annualized Fannie Mae growth rate of 9 percent trails the 12 percent gain expected industrywide.
Q. I own shares of ExxonMobil Corp. Now don't get me wrong, I am pleased with them. But I wonder how long good times for the oil companies can continue. - D.R., via the Internet
A. Oil always will be an unpredictable commodity, which makes it difficult to accurately forecast the length of the positive cycles of these companies and their stock.
However, when they're hot, they're hot. High crude oil prices are responsible for their latest bull run, while the efficiency of the world's largest and most profitable oil and gas company is keeping it at the head of its class.
This colossus formed by the 1999 merger of Exxon and Mobil has a presence in more than 200 countries and is receptive to making deals. ExxonMobil and Saudi Armco, the Saudi Arabian oil company, recently announced a joint $3.5 billion refinery and petrochemical project with China Petroleum & Chemical Corp.
Shares of ExxonMobil (XOM) are up about 25 percent this year, following gains of 28 percent last year and 21 percent in 2003. It is using its substantial excess cash to offer a 2 percent dividend and buy back its own stock.
Despite a decline in production, profits jumped 32 percent to a record $7.6 billion in its most recent quarter, those results aided by strong refining and marketing margins. The firm's economies of scale, cost controls and technological know-how have put it in the driver's seat.
Growth is nonetheless more difficult for an enormous company such as ExxonMobil, many of its oil fields are maturing, and its exploration for new oil increasingly requires going into difficult geographies and unstable countries. Political sanctions mean it can't enter countries such as Iran as its European competitors can.
The consensus recommendation on shares of ExxonMobil is currently a "buy," according to Thomson Financial. That consists of eight "strong buys," six "buys" and four "holds."
ExxonMobil earnings are expected to increase 21 percent this year versus the 25 percent projected for the major integrated oil and gas industry. The forecast for a decline of 1.5 percent next year compares to a predicted decline of 1.8 percent industrywide. The projected five-year annualized growth rate of 8 percent is the same for ExxonMobil and its peers.
President Rex Tillerson is expected to succeed Chairman and CEO Lee Raymond in a smooth transition when he retires at year-end.
There is always controversy surrounding oil companies. Most recently it has involved protests and a call for a boycott of ExxonMobil by U.S. environmental and advocacy groups that object to its efforts to expand oil drilling in Alaska.
Q. I'd like to know your opinion of Dreyfus Appreciation Fund, which has been recommended. - K.C., via the Internet
A. Nobody's perfect. Holding shares of embattled AIG Inc. and Merck & Co. has whacked this fund's returns.
Its emphasis on multinational companies has generally been a drawback during a period in which small-cap stocks have dominated. Yet it has improved a bit this year because it holds 20 percent of its assets in energy stocks.
The $4.59 billion Dreyfus Appreciation Fund (DGAGX) gained 8 percent over the past 12 months and has a three-year annualized return of 6 percent. Both returns rank in the lowest 15 percent of large growth and value funds.
"Expect Dreyfus Appreciation to look good in some markets and not good in others, but nonetheless be an intriguing long-term core holding in an individual's portfolio," said Gareth Lyons, analyst with Morningstar Inc., noting it has largely kept pace with the benchmark Standard & Poor's 500 over the past decade. "It also has a relatively cheap annual expense ratio of 0.95 percent."
It holds more consumer goods companies and fewer technology firms than other blue-chip funds because management seeks high-quality earnings, clean balance sheets and free cash flow. There is tax efficiency thanks to a buy-and-hold approach.
Consumer goods and energy each represent about 20 percent of the fund's portfolio. Other significant concentrations are health care and financial services. Top holdings were recently Exxon Mobil Corp., Altria Group Inc., Intel Corp., General Electric Co., Citigroup Inc., Pfizer Inc., Procter & Gamble Co., Chevron, BP PLC and Walgreen Co.
Dreyfus Appreciation Fund has an experienced management committee led by Fayez Sarofim, who has been on board since 1990. This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment.
If you own several Dreyfus funds, be careful to avoid portfolio overlap. Morningstar notes that Dreyfus offers 20 large-cap funds, most a blend of growth and value, and would prefer that it consolidate its lineup. Dreyfus has also been slow to close funds to new investors when they have rapidly grown in size.
Q. I have seen many advertisements for investments called SPDRs and VIPERs. What are they and how do they work? - D.T., via the Internet
A. Those are product names that companies have given to their exchange-traded funds. You can buy them throughout the trading day on an exchange as you would an individual stock, but they invest in a broad basket of individual stocks like a mutual fund would.
SPDRs, or Standard & Poor's Depository Receipts, are exchange-traded funds that track the S&P 500 or other indexes.
VIPERs, or Vanguard Index Participation Receipts, are exchange-traded versions of existing Vanguard Group index funds.
"We like ETFs for our clients because costs are lower than a typical open-ended mutual fund," said Mark Balasa, certified financial planner, CPA and co-president of Balasa Dinverno Foltz & Hoffman financial advisers in Schaumburg, Ill. "They are tax-efficient, with no capital gains distributions to surprise you as would be the case with an open-ended mutual fund."
But they're not as good a deal for an investor putting in small amounts each month because of their transaction charges for each purchase, Balasa added. Open-ended mutual funds are a better choice for such gradual investment.
Q. I'm handling some investments for my mother. Could you explain clipping coupons? - J.L., via the Internet
A. The interest rate stated on a bond when it is issued, known as its coupon, is typically paid every six months. It remains the same no matter what overall interest rates do.
The concept of clipping coupons comes from the fact that some bonds actually do have coupons attached to them, which holders can tear off and redeem for interest. Senior citizens over the years have sometimes been referred to as coupon clippers because they live off such income. But that imagery is fading because records are now more likely to be handled electronically.
"I wouldn't go for the highest coupon you can get right now because, with interest rates rising, there's likely to be a higher coupon down the road," advised Vern Hayden, a certified financial planner with Hayden Financial Group LLC in Westport, Conn. "You want to buy shorter-term bonds, even though they pay lower rates, because when those bonds mature you have flexibility to take advantage of higher rates."
The maturity date of a bond is the day in the future when investor principal will be repaid. Maturities can range from one day to as long as 30 years.
Q. How long is it necessary to keep various financial and investment records? - S.M., Baltimore
A. From a tax perspective, keep everything pertaining to your tax returns for at least three years from the time you file them. You could be examined any time during that period and would need to prove information on your return.
But since there's a six-year statute of limitations on "substantial omission of income," it's best to keep your tax returns and supporting records at least six years. After that, there's no reason to keep all supporting materials.
"In regard to brokerage statements that show the purchase of a stock years ago, keep them as long as you still own the stock and for at least three years after you sell it," said Martin Nissenbaum, national director of personal income tax planning with Ernst & Young in New York. "You must be able to prove what your cost basis was so you can calculate your gain or loss when you sell the stock."
You may wish to keep records of your financial situation beyond those time periods in order to reference them in the future, Nissenbaum added. That can probably best be done using financial software rather than keeping all underlying documents.
Editor's Note: Andrew Leckey answers questions for Bull & Bear readers only through the column. Address inquiries to Andrew Leckey, #184, 369-B Third St., San Rafael, Calif. 94901-3581, or by e-mail at andrewinv@aol.com.
