Nancy B King

The other evening in Econ and Stocks class I introduced my lecture about company profit margin by asking the following question: “What is the profit margin of grocery stores—Safeway, Kroger (Fred Meyer). In other words, how many cents of profit do you think grocery stores make on every dollar you spend there?” The guesstimates ranged from 8 to 20 percent. What is your best guess? The answer: ʇuǝɔɹǝd ǝǝɹɥʇ oʇ ǝuo. That’s my first point; profit margins are usually smaller than we think they are.

My second point is that profit margins are industry specific (data can be found here). For example, the average profit margin for grocery stores it is 1 to 3 percent (one to three cents per dollar of sales ends up as profit), for the Application Software industry it is 21 percent, for the Soft Drink industry it is 10.4 percent, and for the Aerospace/Defense Products and Services industry it is 6.8 percent.

My third point: check the accuracy of the information you hear. If the media is maligning a company or an industry—too much profit, executive salaries too high, etc.—check the accuracy of the impression. It may or may not be as they say it is. I then asked participants what kind of profit margins they thought healthcare insurance companies had—Cigna, WellPoint, Aetna. Participants felt the profit margins probably ranged between 30 and 40 percent. What is your estimate? The answer: ʇuǝɔɹǝd ㄥ˙ㄣ.

Then one class participant suggested, “Healthcare insurance companies make lots of money because of the high volume of sales (revenues).” A cautionary note, if a company has a high volume of sales, they may have high expenses to turn that volume into profit. Okay, last year Kroger had revenues of $76,733M and WelllPoint had revenues of $56,382M. So that doesn’t seem to support that health insurance companies make “too” much money through their high volume of revenues.

Then someone else said, “Yes, but look at the huge salaries the health insurance CEOs make.” What about that? Kroger’s CEO makes a base salary of $1.2M with a total compensation of $10.3M. WellPoint’s CEO receives a base salary and total compensation of $1.1M and $13M, respectively. So health insurance company CEO compensation does not seem to be out of line with at least grocery store CEO compensation.

This discussion prompted me to come home and create the chart below. I included Pfizer because one of the participants is analyzing it; I included Johnson and Johnson because we agreed it is a “nice family company.” If you are thinking about high profit margins and CEO compensation, check out the “family friendly” Johnson and Johnson company.

For this example I used the industry’s profit margin data from here, the company’s profit margin from here, and the executive’s base salary and total compensation from here .

This is what I’ve been working on the last few days. Now, you know where I will be at least on these dates.

The Stock Market Game Program: Economics and Stocks for Teachers

2 Graded Graduate Credits: $150    September 14, 16, 18 and September 28, 30, October 2, 2010 Tuesday and Thursday evenings 4:30 – 8:00 p.m. and Saturdays 8:00 a.m.- 4:00 p.m.

Using computers, online sites, and specific guidelines, learn about stocks, the stock market, and the effects of the economic cycle on the market. This hands-on class will answer the following questions: What is a stock? What is the stock market all about? What does it have to do with me? How can I tell a quality stock from a dog (no offense to real-life canines)? and How does the economy impact the market?

Become acquainted with the Stock Market Game program, an interactive real-life simulation tool to enhance your core curriculum. Receive a $40 tuition rebate at the end of the semester if you actively use the Stock Market Game in your classroom with at least 3 student teams. Register for free student teams at www.StockMarketGame.org.

Sign up for the class on MLP; register the first night of class.

L’s New Car—after 22 years and 132,000 miles on his other Buick. Just the electronic accoutrements alone on this one will keep him busy for at least 50,000 miles.

A new invention turns plastic back into oil to solve plastic bag and bottle pollution. Beginning now, look at plastic bags and bottles not as trash but as a crude gasoline to fuel your stove or generator. With some refinement it can fuel your motorbike, boat, or car. From the Blest Company in Japan. Yes, ingenuity is alive and well!

I’m thankful I can labor.

I am thankful I have clients—not just generic clients, but ones I enjoy working with and ones I continually learn from.

Today however, I’m not thrilled that Labor Day marks the end of summer. I’m not ready for the rush of fall activities. I could use another week or two of doing nothing but playing. Yet, upward and onward is the reality!

Oh where, oh where,

Has the ‘Recovery Summer’ gone?

Oh where, oh where can it be?

With employment cut short

And recession cut long

Oh where, oh where can it be?

Unemployment rate in June—9.5

Unemployment rate at the end of August—9.6

Added Later: The latest unemployment figure for Alaska is July’s 7.7%. Read the full article in The Anchorage Daily News.

Now, I know why I have been feeling so unenthusiastic about stocks—other than we are in a major recession with no substantial sign of sustainable growth coming our way.

I’ve been working on a lecture about economic cycles and the return on stocks, bonds, and cash. Since I do not have access to the Ibbotson data, I’ve been digging around the Internet and found a great data table from Aswath Damdaran. Take a look at the chart I created from his data, particularly for the return on stocks from 2000-2009 —a minus 0.96%. That is like, “Oh, my gosh!” I know there have been ‘up times’, but the ‘down times’ seem to have left a more lasting impression on me.

Stocks were up 25.92% in 2009. However, stocks were down 36.58% in 2008. Maybe that is why the Downs make more of an impression on me than the Ups.