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Why Delaware?

THE MOTLEY FOOL
Ask the Fool

Published: October 14, 2021

Q: Are most big companies incorporated in Delaware? Why? -- D.D., Lakewood, Colorado
A: A lot of them certainly are. According to Delaware's Secretary of State Jeffrey W. Bullock, Delaware is "the domicile of choice for members of the Fortune 500 at nearly 68%. Approximately 93% of all U.S. initial public offerings are entities registered with Delaware." Examples include Coca-Cola (which is headquartered in Atlanta) and Walmart (based in Bentonville, Arkansas).
The primary reasons for a company to choose Delaware are tax breaks and a business-friendly court system. While Delaware has a corporate tax rate of 8.7%, companies incorporated there that don't conduct business in Delaware don't have to pay state income tax; Delaware also doesn't impose state or local sales taxes.
As for business courts: While those in many states convene juries, the Delaware Court of Chancery employs judges with great business expertise. That makes legal processes there rather efficient. Also, each written opinion supporting a decision sets precedent that can make future case outcomes more predictable than outcomes in a juried system.
Q: What's a tontine? -- H.L., Bridgeport, Kentucky
A: To quote the Merriam-Webster definition, it's "a joint financial arrangement" in which "participants usually contribute equally to a prize that is awarded entirely to the participant who survives all the others." It can take other forms, too: For example, participants might contribute equal sums to a pool and then collect equal payouts from it annually, with payouts increasing in size as the number of living participants shrinks over time.
Tontines were once quite widespread, and there are some annuity products today essentially structured as tontines. Tontines still occasionally appear in movies and TV shows featuring murder plots.
Fool's School
Debt: It's Not Always Bad
When you're studying companies as possible investments, finding one with little or no debt is definitely a good sign. But it's not always bad for companies to carry debt.
Some debt can be useful -- and sometimes almost unavoidable -- for businesses, just as it can be for individuals. To buy a home, for example, you'll likely need to take on a mortgage. Car loans and student loans are useful, too -- as long as the terms and interest rates are reasonable. But high-interest-rate debt (such as that from credit cards) is another matter, and can be hazardous to our financial security.
Similarly, companies taking on debt can get an infusion of cash, allowing them to grow or sometimes just to survive. It must be manageable, though. When companies carry a lot of debt, they're locked into required interest payments; if at any point they don't have the cash to meet those obligations, they're in trouble. Even if they can make their payments, they'll be spending money that they might have been able to use in other, more productive ways.
Investors considering companies with debt need to evaluate whether the debt taken on is manageable, and whether the money raised and invested seems to be earning more than it costs.
Perhaps you're worried about the debt load of Scruffy's Chicken Shack (ticker: BUKBUK). The notes in its annual report should detail the interest rates it's being charged. If you find that the effective interest rate for its debt is 4%, and if Scruffy's is putting its borrowed funds to work earning 8%, that's not very worrisome. But if Scruffy's is generating $300 million in cash each year while owing $500 million in annual interest payments, that's not so good.
Publicly traded companies can also raise money by issuing more stock via a "secondary offering." But creating more shares of stock can dilute the value of existing shares, hurting current shareholders. So taking on debt may be a better choice. Still, it's best to find little to no debt on a balance sheet.
My Dumbest Investment
Shoulda, Woulda, Coulda
My dumbest investment moves have been failing to buy shares of Apple and Microsoft in the 1980s and 1990s. I knew they had great potential. Shoulda, woulda, coulda ... -- Trin, online
The Fool responds: You're not alone -- most of us regret moves we didn't make as well as moves we did. It's easy to look now at companies such as Apple and Microsoft -- which recently had market values near $2.4 trillion (!) and $2.2 trillion, respectively -- and slap your forehead in dismay that you didn't buy shares decades ago.
One way to avoid this kind of mistake in the future, if you're eager to invest in a company but aren't ready to fully commit, is to start with a small position: Just invest a portion of the amount you'd normally spend on the stock. Then you can keep following the company, and over time, if you grow more confident in it, you can add to your position by buying more.
Keep in mind that seeing great potential isn't enough on its own to warrant buying a stock. Lots of products and companies have shown tremendous promise, but ultimately failed -- remember Betamax video recorders and Toys R Us?
Dig into a company deeply, looking for sustainable competitive advantages, confidence-inspiring leadership and excellent financial numbers: solid and growing profit margins, market share, revenue and earnings. Growth catalysts on the horizon are also promising signs.
Foolish Trivia
Name That Company
I trace my roots back to 1906, when a teenager in Japan turned his family's tailoring business into a specialty sock maker. After he added rubber soles to the socks in the 1920s, he began manufacturing tires, establishing me in 1931. I was making golf balls by 1935 and rubber hoses by 1937. I merged with Firestone in 1988. Today, based in Tokyo and with a U.S. division headquartered in Nashville, I'm a global giant in tires and rubber. I employ about 140,000 people and operate in more than 150 countries and territories. My brands include Primewell and Fuzion. Who am I?
Last Week's Trivia Answer
I trace my roots back to 1919, when a guy in Barcelona started selling yogurt through pharmacies to improve the health of people after World War I. During World War II, I launched in the U.S., with some strawberry jam mixed in. Today, with more than 100,000 employees in more than 55 countries and products sold in over 120 countries, I'm a global leader in fresh dairy and plant-based products. My brands include Actimel, Activia, evian, Horizon Organic, Oikos, Silk and Volvic, among others. I rake in more than 23.6 billion euros annually. Who am I? (Answer: Danone)
The Motley Fool Take
Renewable Energy for the Win
The global energy transition to cleaner power sources is a massive market opportunity. Renewable energy leader Brookfield Renewable (NYSE: BEP) (NYSE: BEPC) estimates that it will cost more than $100 trillion over the next 30 years to advance a lower-carbon future. That megatrend should power steady growth for Brookfield for years to come.
Within this megatrend are many smaller yet still sizable opportunities. One emerging high-return investment opportunity for Brookfield is wind repowering, which involves replacing turbine hardware with longer rotors and more efficient equipment. CEO Connor Teskey has noted, "With an estimated 200 gigawatts of global wind capacity reaching 15 years of age within the next five years, the global market for repowerings is large ... and is only one segment where we continue to grow our business at attractive returns."
Meanwhile, nearly 130 governments have established net-zero carbon emission targets. Close to 3,100 businesses have committed to halving their carbon emissions by 2030. This presents a huge opportunity for Brookfield Renewable, which stands out as one of the world's leading providers of renewable energy.
Brookfield Renewable expects to generate total returns of between 12% and 15% "on a per-unit basis over the long term." With the demand for renewable energy expanding, and a massive development pipeline poised to provide significantly more capacity, the company should be in a strong position to achieve that goal, creating value for shareholders along the way.
COPYRIGHT 2021 THE MOTLEY FOOL, DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION, 1130 Walnut, Kansas City, MO 64106; 816-581-7500.


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