Strong earnings rate Wendy's a 'hold'

I would like to know if my shares of Wendy's International Inc. will continue to grow in my IRA.

- C.M., via the Internet


The nation's third-largest hamburger chain - behind McDonald's and Burger King - isn't just trying to sell more food. It could be trying to sell itself.

Introduction of a breakfast menu in 650 of its more than 6,600 Wendy's restaurants, additional Frosty Float flavors, new sandwiches, the "Do What Tastes Right" ad campaign and job cuts are all moves to try to turn itself around.


Nothing is easy when commodity prices are rising and competition is fierce. Same-store sales growth has slowed and the company reduced its profit forecast.

The company spun off its Tim Hortons doughnut chain and sold Baja Fresh Mexican Grill chain last year under pressure from the Pershing Square Capital Management hedge fund.

It is currently being pressured by Nelson Peltz, who controls funds that own nearly 10 percent of its shares. Peltz, whose Triarc Cos. owns Arby's, received three seats on the Wendy's board last year and has referred to his firm as a "natural, strategic buyer" for the chain.

A review by JPMorgan Chase & Co., Lehman Brothers Inc. and a board committee is soliciting bids to determine whether to try to sell the company or find other ways to boost stock price. "While a sale remains only one of the alternatives under consideration, we believe it merits more thorough examination," Wendy's Chairman James V. Pickett said in a statement.

Amid sale speculation, Wendy's shares (WEN) are up 12 percent this year after gains of 28 percent last year and 41 percent in 2005.

But Moody's Investors Service lowered its Wendy's credit rating to Ba2 from Baa2, which it said was "prompted by the company's weak operating performance." Both are non-investment grade. It placed the rating on review for another possible downgrade due to the sale possibility.

Consensus rating of Wendy's is "hold," according to Thomson Financial, consisting of one "strong buy," 11 "holds," one "under perform" and two "sells."

Despite the corporate drama, Wendy's remains a strong brand.


Earnings are expected to rise 203 percent this year over last year's weak results, Thomson said. Eighteen percent is predicted for the restaurant industry. Next year's projected 31 percent compares with 20 percent forecast industrywide. The five-year annualized return is expected to be 12 percent versus 14 percent for its peers.

Eaton Vance Utilities Fund was recommended to me. What are its prospects?

- V.C., via the Internet

Changes in the utilities industry have meant change for this dividend-focused fund.

Utility stock valuations have escalated significantly, and fewer companies are available because of mergers and private equity deals.

So the fund decided to become more diversified than the stocks of utility, telecommunications and energy firms that it traditionally held. It will still invest at least one-fourth of portfolio in utilities, but will seek dividend growth in other industries. In addition, Judy A. Saryan, who had managed it as a utilities fund since 1999, has been joined by co-manager Charlie Gaffney.


The $1.6 billion Eaton Vance Utilities Fund "A" (EVTMX) gained 40 percent the past 12 months and has a three-year annualized return of 29 percent. Both rank in the top one-fifth of utilities funds.

Its name will change to Eaton Vance Dividend Builder Fund, effective Aug. 15.

"If you are an investor who bought this fund because you wanted a utility fund, you'll want to find another fund now because this one won't fill the bill anymore," said Paul Herbert, analyst with Morningstar Inc. in Chicago. "However, we're still favorable on its portfolio manager and approach, so I wouldn't say it is a 'sell' for everyone."

It will become a large value fund or a large growth-and-value fund, depending on how its portfolio shapes up, Herbert said. This likely means more holdings in financial services and industrials. Many high-quality managers operate in that popular investment category, so it won't be the best of that breed, he said.

Utilities recently represented 60 percent of the portfolio, with telecommunications about 30 percent. The remainder was scattered in energy, business services and media. Top holdings recently were AT&T; Inc., Constellation Energy Group Inc., CMS Energy Corp., Veolia Environnement, Edison International, Verizon Communications Inc., NRG Energy Inc., TXU Corp., Scottish and Southern Energy PLC and FirstEnergy Corp.

The fund has a 5.75 percent "load" (sales charge), $1,000 minimum initial investment requirement and an annual expense ratio of 1.06 percent.


I have been warned about investing in a mutual fund before it gives out its capital gains. When does this take place and how can I avoid it?

- P.H., via the Internet

A mutual fund is required each year to declare distributions, an event that usually takes place in November or December.

Profits from the securities that it sold, even if the overall fund performed poorly, must be paid out in this distribution. It is taxable for a shareholder.

"If you're heading into October and want to invest in a stock fund, call the fund and ask its customer service representative if it expects to make a distribution and how large it will be," said Mark Salzinger, publisher and editor of the No-Load Fund Investor ( in Brentwood, Tenn. "If the distribution is more than, say, 10 percent of the fund's net asset value, it might make sense to wait."

A well-managed fund will have mostly long-term capital gains from stocks held at least a year in its portfolio, he said, so most of those gains will be taxed at long-term rates. "If you own your funds in a retirement account such as an IRA, you don't have to worry about any of this," Salzinger said, because funds can grow tax-deferred.


Andrew Leckey writes for Tribune Media Services.