Dear Mr. Berko: My spouse and I are both 55 and have $15,000 we’d like to invest for at least 12 years. Would you recommend two stocks that we can buy, hold — reinvesting the dividends — and put away in our “retirement drawer”? In 2028, when we’re both 67, we’d use them for our retirement income. Pfizer is the only stock we know about. My wife works for the company in its big lab here in St. Louis. Is this stock a good one to buy? Both of us have decent retirement accounts where we work, and the $15,000 is part of a $35,000 certificate of deposit that came due last month. We don’t want mutual funds. We want one stock to be very conservative and the other to be a little aggressive. — KT, St. Louis
Dear KT: ADP LLC (ADP-$87) is among the most unexciting, boring companies to ever list on the Big Board. Look up “conservative” in Merriam-Webster’s dictionary and a summary of ADP and its management might stare you in the face.
With 55,242 employees and 632,103 clients, ADP is the largest provider of business outsourcing solutions in the nation. Its employer services division provides payroll and tax services and accounted for 71 percent of 2015’s $11 billion in revenues. ADP’s professional employer organization services provide comprehensive human resources solutions to smaller companies and accounted for 29 percent of last year’s revenues. When the company attracts a new client, those new clients tend to stay with ADP for more than 10 years. That’s impressive.
Wall Street expects the ES division to grow revenues by about 4 percent annually as the number of employees on corporate payrolls gradually increases. ADP’s results do not depend on the marginal need for employees; rather, they depend on the aggregate level of employment, which doesn’t vary greatly. Its PEO services, fueled by the confusing conflicts of the Affordable Care Act and continuing federal changes in human resource regulations, are expected to grow by 14 to 16 percent annually. In the past 10 years, revenues have increased by 50 percent; net profit margins have averaged a strong 12.5 to 13 percent; and the dividend has tripled. That’s very impressive, too. Management’s disciplined capital allocations have allowed ADP to grow its dividend annually for 40 years. And in the past decade, return on capital has steadily improved by 50 percent, while return on equity has more than doubled. And so should your investment in ADP. Remember to reinvest the $2.12 dividend, which yields 2.36 percent.
Pfizer (PFE-$31.50) is a pfine company, but I’d rather you owned BlackRock Health Sciences Trust (BME-$32.72). A little over a year ago, BME was trading happily between $47 and $49, when several brokerages wrote that high medical costs would force the government to consider price controls on health care spending. The health care sector collapsed, and so did BME — which imploded by 40 percent, to $29. Be mindful that the costs and profits of health care always expand to greet the amount of government money available.
BME is a smallish closed-end health care fund with a $280 million portfolio of health care assets. The company focuses on a broad range of health care issues, including pharmaceuticals, biotechnology companies, makers of medical devices, HMOs, nursing homes, insurers and hospitals.
And the health care industry is where the big bucks always will be made because it can raise prices outrageously with impunity. Look at what has happened to drug prices! Last year, numerous health care groups contributed an estimated $408 million to members of Congress. Because that’s about $750,000 for each member of Congress, this industry can do whatever it wishes. Sen. Daniel Patrick Moynihan, who passed away in 2003, said it best while corrupting a line from a Robert Penn Warren character: “Congress was conceived in sin and born in corruption and its members passeth from the stink of the didie to the stench of the shroud.”
Resultantly, BME has enjoyed a five-year annualized return of 16.1 percent, a 10-year annualized return of 14.1 percent and an annualized 12.8 percent return since its initial public offering in 2005. That’s very impressive. Many believe that BME could grow fourfold by the time you guys hang up your tools at 67. And remember to reinvest BME’s 40-cent dividend, though it yields bupkis.
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.
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