Tyco attempting changes as a way to escape its past

Your Money

December 31, 2006|By Andrew Leckey | Andrew Leckey,Tribune Media Services

have held Tyco Inter — I have held Tyco Inter- national Ltd. shares a long time. Do you think I should keep holding?

- R.C., via the Internet

There's never a dull moment for shareholders of this Bermuda-registered conglomerate that's working to engineer a comeback in both results and public image.

It recently announced a 38 percent gain in fiscal fourth-quarter profits and a $600 million restructuring program to improve operating efficiency.

Its underperforming printed circuit group has been sold off, several health-care technology firms have been acquired, and its ADT home-security sales organization has changed from independent dealers to an internal work force.

Most importantly, to release the underlying value of its various divisions Tyco is splitting into three separately traded companies in a transaction expected to be completed in March.

The fire and security business and the engineered products and services unit will be retained. The health care and electronics segments will be spun off to shareholders as two separate companies through tax-free stock dividends.

Shares of Tyco International (TYC) are up 7 percent this year after declining 19 percent last year and gaining 35 percent in 2004.

Despite its strong balance sheet and firmly entrenched businesses, the company is haunted by its past.

Because of previous accounting errors in stock option practices, Tyco must record $191 million in compensation expenses and restate earnings for 1999 through 2002.

Raymond Stevenson, Tyco's former tax department chief, was sentenced recently to three years in prison for failing to report $170 million in income at the firm. Three other former financial executives have been charged with securities law violations for structuring phony transactions to increase income and cash flow.

Gone but not forgotten, former Tyco Chief Executive Officer L. Dennis Kozlowski and former finance chief Mark H. Swartz remain in prison after being convicted of taking more than $150 million from the company.

Amid the many changes under way and a reputation that's hard to shake, the consensus rating of Tyco stock on Wall Street is currently midway between "buy" and "hold," according to Thomson Financial. That consists of one "strong buy," five "buys" and eight "holds."

Earnings are expected to increase 10 percent this fiscal year ending in September versus 14 percent forecast for the diversified electronics industry.

Next fiscal year's projected 11 percent gain compares with 13 percent expected for its peers. The five-year annualized growth rate of 13 percent exceeds the 11 percent forecast industrywide.

Finally, recent concerns about Tyco have included recalls and quality issues in its health-care business; the fire and security division growing slower than anticipated; and raw material costs rising in electronics.

I have Vanguard Windsor Fund in my retirement account. Is it still worth holding?

- K.T., via the Internet

This reliable fund, which has been around since 1958, has a contrarian mind-set that celebrates out-of-favor large-capitalization stocks.

The portfolio is run by Wellington Management Co. and Sanford C. Bernstein & Co. It has a low annual expense ratio of 0.36 percent.

The $24 billion Vanguard Windsor (VWNDX) has had a total return of 17 percent during the past 12 months to rank in the top one-third of large value funds. Its three-year annualized return of 13 percent puts it just above the midpoint of its peers.

"I recommend Windsor as a good core holding for someone who believes in buying low, selling high and hanging on for the long term," said Dan Culloton, analyst with Morningstar Inc. in Chicago, noting the fund's excellent long-term record. "However, that person must be aware that in order to beat the market over the long haul you sometimes must go against it in the short run."

Committed contrarian David Fassnacht took over lead management of the Wellington team in mid-2004 and is backed by an experienced group.

Bernstein also is value-oriented, but uses a few more quantitative tools to back up fundamental research. Since Bernstein came on board in mid-1999 the fund has become less concentrated in a few stocks.

Because of its dedicated approach, Windsor can sometimes seem out of step with the market, with 1997, 1998 and 2002 years of weak performance. It is lagging much of the large value group because more than half of its assets are in giant-cap stocks that have been out of favor.

Nearly one-fourth of its portfolio is in financial services, with other concentrations in industrial materials, health care and hardware. Largest holdings recently were Citigroup, Bank of America, Cisco Systems, Comcast, Sprint Nextel, Wyeth, Tyco International, Microsoft, Alcoa and Sanofi-Aventis.

This "no-load" (no sales charge) fund requires a $3,000 minimum initial investment.

Would it make sense to take out $10,000 in a home equity loan and invest it in the stock market? Upside? Downside?

- R.V., via the Internet

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