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Book value explained
THE MOTLEY FOOL
Ask the Fool
Published: May 7, 2020
Q: What's a company's book value? -- G.H., West Palm Beach, Florida
A: Book value is an accounting measure that investors sometimes look at to get an idea of a company's intrinsic value. Boiled down, book value is simply the company's total assets, less its total liabilities. It's showing you what shareholders would own once debts and liabilities are covered.
Book value's usefulness has shrunk somewhat as our economy has evolved. It worked well when most businesses were simpler and capital-intensive, with assets such as factories, equipment and land appearing on the balance sheet. It works less well today, though, as there are gobs of service-oriented companies and high-tech companies that are heavy on intangible assets, such as patents and goodwill (an accounting measure often tied to acquisitions).
Consider Facebook, with many assets that don't register significantly on the balance sheet: intellectual property, employees, a strong brand and a massive worldwide network of customers. As of the end of 2019, its total assets were $133.4 billion and its total liabilities $32.3 billion, leaving a book value of $101.1 billion. That's far less than its recent market value of roughly $540 billion.
Consider, too, a company that owns many buildings: Over the years, their value on the balance sheet is depreciated, eventually to zero. They're not really worth zero, though, and they can even appreciate over time. Such a company can also be worth much more than its book value. With many companies, your best bet is to ignore book value.
Q: What's an ETF? -- R.M., Barre, Vermont
A: Exchange-traded funds (ETFs) are bundles of securities, very much like mutual funds; the difference is that they trade like shares on a stock exchange.
Fool's School
Annuities 101
Consider including annuities in your retirement plan. With an annuity, you pay an insurance company a sum of money in exchange for a promise of a payment or series of payments beginning now or in the future. The payments can be for a certain number of years, or the rest of your life. Here are the main types of annuities:
-- Fixed immediate annuities: These are basic, classic annuities: You hand over a lump sum and get a specified income for the rest of your life, or for a specified period. They can help you avoid running out of money later in life, and they can protect your spouse, as well; they can even offer inflation protection. These annuities can be a good way to lock down some guaranteed income.
-- Fixed deferred annuities: These start paying you at a specified point in the future. One set up to start paying you at age 80 or 85 could be useful, in case your other funds are running out by then. They also free you from having to monitor investments late in life -- you'll simply collect the checks.
-- Variable annuities: Some variable annuities may be appealing, but many charge steep fees and hefty "surrender charges" if you need your money back. Their returns are often not stellar, either. They also tend to be very complicated financial instruments, and it's always best to avoid what you don't fully understand.
-- Equity-indexed annuities: These are highly problematic. They may be advertised as offering a "guaranteed" return based on the performance of an index (such as the S&P 500 stock index), but that return is likely to be several percentage points lower than the index's -- and it will often be capped. So if the S&P 500 soars 18%, you might get only, say, a 10% return. And that's before any fees, which can be significant. You'd likely do much better simply investing in the stock index itself.
For clear and concise retirement advice, try our "Rule Your Retirement" service at Fool.com/services.
My Dumbest Investment
Time Is Money
My dumbest investment was not investing soon enough. I wanted to get into the market, but I was too nervous and constantly put it off. I wasted a few valuable years of gains. Now I spend time trying to get others comfortable with getting in! My lesson learned: Time is money. -- K.D., online
The Fool responds: That's a great lesson indeed.
Imagine that you start investing at age 40 and sock away $5,000 per year for 25 years, until you're 65, and that you earn an average annual gain of 8%: You'd end up with nearly $400,000. But if you'd started five years earlier, at age 35, and saved and invested for a total of 30 years, you'd end up with more than $600,000 -- a difference of more than $200,000!
No one should jump into the stock market until they're comfortable with what they're doing, so it's smart to read up on the topic first -- ideally, while you're still young. You don't even have to read and learn very much, if you just stick with low-fee, broad-market index mutual funds, such as ones that track the S&P 500.
Not everyone can sock away $5,000 annually, but invest however much you can, and remember that only money you won't need for five (or even 10) years should be in stocks, as the market can be volatile.
Foolish Trivia
Name That Company
I trace my roots back to the 1802 creation of a gunpowder mill on the Brandywine River in Delaware by a French immigrant and family friend of Thomas Jefferson. In 1903, I set up my Experimental Station, one of the world's first industrial research and development facilities; here, products such as nylon, Lycra, Kevlar and Tyvek were conceived, along with neoprene -- the first synthetic rubber. Today, my market value is over $30 billion, and my brands include Corian and Styrofoam. I completed a merger with Dow Chemical in 2017 and then spun it off in 2019. Who am I?
Last Week's Trivia Answer
I trace my roots back to the 1806 launch of a starch, soap and candle business in New York City. In 1896, I debuted toothpaste in a collapsible tube. My name is the product of a 1928 merger. Today, with a market value recently topping $62 billion, I'm a consumer products giant with many brands, such as Tom's of Maine, Speed Stick, Softsoap, Irish Spring, Murphy Oil Soap, EltaMD, Ajax, Fabuloso and Hill's Science Diet. I've paid uninterrupted dividends on my common stock since 1895, and have hiked that payout for 57 consecutive years. Who am I? (Answer: Colgate-Palmolive)
The Motley Fool Take
A Pharmaceutical Bargain
Big pharma titan Pfizer (NYSE: PFE) has had a dismal year. The company's shares were recently down more than 35% from their 52-week high, reaching a five-year low. Apart from the coronavirus-induced sell-off, Pfizer's shares have also suffered from a lack of confidence among investors.
Possible government price controls are one worry, but there's also Pfizer's plan to spin off its generic drug business Upjohn, pairing it with Mylan and forming a new entity called Viatris. As this move will significantly shrink the company's annual revenue, investors appear to be concerned about the sustainability of Pfizer's top-notch dividend (recently yielding 4.1%), along with its prospects as a growth-oriented branded drug company.
These concerns are likely way overblown, though. First, current Pfizer shareholders will own a piece of Viatris. That's important because the combined yield of Pfizer and Viatris should at least equal -- and quite possibly exceed -- the company's current annualized payout.
Also, Pfizer has laid out a strong case explaining why its five core growth products -- Vyndaqel, Ibrance, Xeljanz, Eliquis and Prevnar -- should deliver top-line growth of at least 6% per year for the next five years. Once the global pandemic fades, Pfizer should come roaring back. (The Motley Fool has recommended Mylan.)
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