Dear Mr. Berko:
In 2008, I was 46. My husband passed away that year, and my 600 shares of United Technologies were selling at $43 each. I own eight stocks, United Technologies, which recently announced a spinoff into three companies. I’m now 56, and my stockbroker for the past 10 years, who was my husband’s broker before he passed away, wants me to sell my United Technologies shares, which now trade for $103. He wants me to invest the proceeds in an annuity he said would make at least 8 percent a year.
I wrote to you last month and asked you what to do, and you told me to forget the annuity and “keep United Technologies, the spinoffs and the other seven stocks for the rest of your life.” My broker said you are wrong, plus some nasty things, and told me I won’t be able to keep United Technologies anymore.
This spinoff is confusing me and makes things different than they were before. That’s why I’m writing this second letter. Please tell me again whether this is good for me or bad for me and what to do. I don’t like this, because I want to keep things simple.
— D.S., Oklahoma City
Don’t you sell a single stock in that portfolio, including your shares of United Technologies (UTX), which are now $117, and keep the eventual spinoffs. Now you’ll have a 10-stock portfolio instead of an eight-stock one.
When I was a kid, which was a long time ago, and something disappointing or unexpected occurred, my dad would say, “It happens.” Meanwhile, I’d change brokers if I were you. I received two nasty calls from your broker, who lambasted me for interfering in his livelihood. He was smoking mad. His language needed cleaning up, and he barked like a rabid dog. I could almost feel his spittle on my face across the phone line. And he called twice in three days. I get nasty calls from angry brokers a few times a year, but his calls really took the cupcake. I guess this ugly bugger has some financial obligations coming due soon and sorely needs that 8 percent commission.
My biggest problem with this annuity is the excessive costs. In my opinion, there are few things on God’s green earth that are worth paying an 8 percent commission for. This annuity isn’t one of them. Meanwhile, the 3.6 percent annual fees that you would pay the insurance company (every year you owned the annuity) for mortality, management of subaccounts, etc., would be disgustingly egregious. Those fees would mean that this annuity would have to earn 11.6 percent to net 8 percent. Not even Warren Buffett can earn 11.6 percent every year. In fact, some years, Warren actually loses money.
UTX recently bought Rockwell Collins for $23 billion, and management is separating its commercial businesses, Otis and Carrier, into independent entities. United Technologies, Otis and Carrier differ in profitability, capital requirements, investment horizon and long-term growth potential, but they all certainly have good merit. And each will be listed on the New York Stock Exchange. The spinoff means that each business will have more focused management and a more dedicated investor base and hence a better opportunity for appreciation. Each of these companies will have investment-grade balance sheets, and the dividend of the three will equal the dividend payout of UTX prior to the spinoff. However, most investors believe that the market values of these three parts will exceed the current market value of UTX. I understand that there are several companies listed on the NYSE that may make a bid for Otis, which has over $12 billion in revenues. Carrier, with $18 billion in revenues, probably the largest and best-known air conditioning company, could run into antitrust problems if it were to become involved in a merger or buyout. Meanwhile, Rockwell Collins was a $7 billion aerospace, avionics and information technology company. The Rockwell purchase was a hand-in-glove fit. With its jet engines and flight control systems, the new UTX will generate about $47 billion in revenues. And you’ll have 10 wonderful stocks.•
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or email him at firstname.lastname@example.org. The opinions expressed in this column are those of the author.
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