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Investing Insights for Unisys Corporation Employees: The Pros and Cons of Dollar-Cost Averaging vs. Lump-Sum Contributions

The Value Series

What is Book Value?

Testing

Weighting

The Brandes Research Institute

About The Retirement Group

Sources

The Value Series

Given the current elevated market volatility, we think now is a good time to revisit important value metrics in our four-part series. As an employee or retiree of Unisys Corporation, who likely has little market analysis experience, we understand that the valuation process can seem confusing. However, we are here to tell you that the valuation process does not have to be complex to be successful. Simple valuation techniques such as the price-to-book ratio are generally easy to use and have been proven to be effective if utilized correctly. Investors are often looking for ways for their clients to beat the market. If you're one of those investors, you may want to consider the following strategy that has been implemented by the investment greats. Some value investors have historically beat the average annualized returns of the S&P 500, and many have successful track records spanning several decades to prove it. Unisys Corporation employees, it is important to be knowledgeable regarding tactics used by famous investors such as Warren Buffett, Benjamin Graham, David Dodd, Charlie Munger, Christopher Browne and Seth Klarman. The investment style implemented by these professionals focus on four metrics that characterize a value investment. These four metrics include the Price to Earnings Ratio, the Price to Cash Flow Ratio, High Dividend Yield and the Price to Book Ratio. These metrics, as you will see, are strong indicators of undervalued security. If undervalued security is brought back to fair value then we would see positive returns on that security. For Unisys Corporation employees, it is possible to utilize these metrics to better position yourself in the market for heightened returns. We will examine the effect of investing based off of certain characteristics and how their investment returns are correlated. Today, I want to end the four-part TRG Value Series with the granddaddy of metrics, the Price-to-Book value ratio (P/B).

What is Book Value?

Book value is preferred by many value investors to cash flow and earnings metrics because it is more stable year-to-year whereas cash flow and earnings can vary greatly. This is an important property for those at Unisys Corporation to look out for due to the following reason: When a business at a cyclical trough with diminished cash flow and earnings might look expensive on the basis of price-to-cash flow or price-to-earnings, that same business may appear cheap on the basis of price-to-book value. This is because book value won’t fall much or at all in a downturn, and vice versa. Thus, the argument goes, the price-to-book value gives a more reliable picture of a company’s usual business performance, which Unisys Corporation employees can use to elevate their investment decisions and investment performance. Benjamin Graham popularized the indicator in his books “Security Analysis” and “The Intelligent Investor”. Nobel Prize winner Eugene Fama and his research partner Kenneth French used the ratio in their three- and five-factor models to describe stock returns. Professor Joseph Piotroski uses the ratio as the only valuation measure in his F-Score methodology.

Testing

We understand the importance of data driven research for Unisys Corporation employees and retirees. Set out below are the results of two Fama and French backtests of the book value-to-market equity (the inverse of the PB ratio) data from 1926 to 2013. As of December 2013, there were 3,175 firms in the sample (Carlisle-PB, P2). The value decile contained the 459 stocks with the highest earnings yield, and the glamour decile contained the 404 stocks with the lowest earnings yield.

The average size of the glamour stocks is $7.48 billion and the value stocks are $2.54 billion. (Note that the average is heavily skewed by the biggest companies. For context, the 3,175th company has a market capitalization today of $404 million, which is smaller than the average, but still investable for most investors). Portfolios are formed on June 30 and rebalanced annually. When accounting for this backtest, Unisys Corporation employees may recognize how two portfolios are weighted by market capitalization, which means that bigger firms contribute more to the performance of the portfolio, and smaller firms contribute less. Here, we can see that the value decile has comprehensively outperformed the glamour decile, returning 12.6 percent compounded (17.7 percent in the average year) over the full period versus 8.6 percent for the glamour decile (10.9 percent in the average year) (Carlisle-PB, P3).

These returns are considerably lower than the returns found for the price-to-earnings and cash-flow ratios discussed earlier. Despite the irregularity, Unisys Corporation employees must be aware that the earnings and cash flow back tests ran back to only 1951, and the book value return data begins in 1926. The difference is due to the 1929 crash, which had an oversized impact on returns. The impact of the crash is visible on the chart; it took twenty years for the value decile to fully recover. Unisys Corporation employees must also note how something similar has happened to the glamour decile since 2000; it hasn’t grown in 13 years. To make a comparison possible of the book value’s performance to the performance of earnings and cash flow over the same period, I also measured the returns beginning in 1951. Since 1951, the low P/B value decile has generated a compound annual growth rate (CAGR) of 15.0 percent and an average annual return (AAR) of 17.9 percent. Over the same period, the glamour decile returned a CAGR of 9.6 percent and an AAR of 12.6 percent (Carlisle-PB, P5). These returns are approximately the same as the returns generated by the low P/CF and P/E studies over the same period.

In their study, they found that the quintile of the lowest P/E stocks significantly outperformed the high P/E quintile. The portfolio containing the lowest P/E stock returned 11.61% annualized compared to 4.83% for the highest P/E portfolio and 7.55% for the used universe of stocks. The graph below shows how the cumulative returns compare (it’s not even close). Unisys Corporation employees can utilize this information to avoid investing in underperforming assets and better predict economic trends that translate into higher ROI.

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Weighting

It is important for employees and retirees of Unisys Corporation to understand how market capitalization-weighted returns are useful for demonstrating that the outperformance of value over glamour is not due to the value portfolios containing smaller stocks. Unless you’re running an index (or hugging an index), they’re not really meaningful. The easiest portfolio weighting scheme is to simply equally weight each position. (If we’re prepared to put up with a little extra volatility for a little extra return, we can also Kelly weight our best ideas). Kelly Weighting is determined by the Kelly Criterion which is a formula used to determine what percentage of their capital should be used in each trade to maximize long-term growth. There are two key components to the formula (Kelly % = W- [(1 - W) / R]): the winning probability factor (W) and the win/loss ratio (R). The winning probability is the probability a trade will have a positive return. The win/loss ratio is equal to the total positive trade amounts divided by the total negative trading amounts. The result of the formula will tell investors what percentage of their total capital they should apply to each investment. By utilizing the Kelly Weighting, investors employed or retiring from Unisys Corporation can have a better grasp of their exposure to each individual asset in their portfolio and make informed decisions regarding their asset allocation.

Unisys Corporation employees should also account for the equal weight return statistics for book value. In the equal weight backtest, the value generated a 20.2 percent compounded return (27.3 percent on average), beating out glamour’s 6.3 percent compounded return (10.4 percent on average) (Carlisle-PB, P10). Since 1951 the equally weighted P/B value decile has generated a compound annual growth rate (CAGR) of 20.0 percent and an average annual return (AAR) of 25.4 percent (Carlisle-PB, P11).

Over the same period, the glamour decile returned a CAGR of 6.4 percent and an AAR of 10.8 percent. These returns are close to the same as the returns generated by the low P/CF and P/E studies over the same period. When accounting for this information, Unisys Corporation employees must recognize that the value portfolios outperformed because they bought more book value per dollar invested than the glamour portfolios: 4.57x on average versus 0.25x in the glamour portfolios (Carlisle-PB, P12). In the equal-weight portfolios, value has significantly outperformed glamour since 1999, beating it by an extraordinary 15.9 percent compounded, and 16.1 percent in the average year (Carlisle-PB, P13).

The Brandes Research Institute

Because we understand just how important data-driven solutions are for our Unisys Corporation employees and retirees, we have provided another study, which discusses the P/CF ratio. In a Brandes Research Institute study, Exhibit 6 below illustrates the global all-cap findings across three price metrics.

The results confirmed a consistent value premium across all metrics. We will focus on the P/CF ratio and the outperformance in the decile 10 value stocks. The smallest outperformance between decile 1 glamour stocks and decile 10 value stocks can be observed with the P/B measurement, where the average outperformance was 7.1% (Brandes, p. 8).

About The Retirement Group

The Retirement Group is a nation-wide group of financial advisors who work together as a team.

We focus entirely on retirement planning and the design of retirement portfolios for transitioning corporate employees. Each representative of the group has been hand selected by The Retirement Group in select cities of the United States. Each advisor was selected based on their pension expertise, experience in financial planning, and portfolio construction knowledge.

TRG takes a teamwork approach in providing the best possible solutions for our clients’ concerns. The Team has a conservative investment philosophy and diversifies client portfolios with laddered bonds, CDs, mutual funds, ETFs, Annuities, Stocks and other investments to help achieve their goals. The team addresses Retirement, Pension, Tax, Asset Allocation, Estate, and Elder Care issues. This document utilizes various research tools and techniques. A variety of assumptions and judgmental elements are inevitably inherent in any attempt to estimate future results and, consequently, such results should be viewed as tentative estimations. Changes in the law, investment climate, interest rates, and personal circumstances will have profound effects on both the accuracy of our estimations and the suitability of our recommendations. The need for ongoing sensitivity to change and for constant re-examination and alteration of the plan is thus apparent.

Therefore, we encourage you to have your plan updated a few months before your potential retirement date as well as an annual review. It should be emphasized that neither The Retirement Group, LLC nor any of its employees can engage in the practice of law or accounting and that nothing in this document should be taken as an effort to do so. We look forward to working with tax and/or legal professionals you may select to discuss the relevant ramifications of our recommendations.

Throughout your retirement years we will continue to update you on issues affecting your retirement through our complimentary and proprietary newsletters, workshops and regular updates. You may always reach us at (800) 900-5867.

Sources

What to do with an Early Retirement Ebook
Social Security Ebook
Lump Sum vs. Annuity Ebook
401(k) Rollover Strategies Ebook
Closing the Retirement Gap Ebook
Brandes Institute, The. “Value vs. Glamour: A Long-Term Worldwide Perspective”. 2014. < https://www.brandes.com/docs/default-source/brandes-institute/value-vs-glamour-worldwide-perspective>.
Carlisle, Tobias. “Investing Using the Price-to-Earnings Ratio and Earnings Yield (Backtests 1951 to 2013)”. May 26, 2014. <http://greenbackd.com/2014/05/26/price-to-earnings-ratio-backtest-1951-to-2013/>.
Causeway Capital. “The Compelling Case for Value Stocks”. 2018 https://www.causewaycap.com/wp-content/uploads/2018/02/201802-TheCompellingCaseforValue-1.pdf
Research Affiliates. “To Win with ‘Smart Beta’, Ask if the Price is Right” September 7, 2016 < https://seekingalpha.com/article/4004564-win-smart-beta-ask-price-right>
Tweedy Browne Company LLC. “What Has Worked in Investing: Studies of Investment Approaches and Characteristics Associated with Exceptional Returns.” 1992. <http://www.tweedy.com/resources/library_docs/papers/WhatHasWorkedFundVersionWeb.pdf>.
Yuan, Vera. Guru Focus. “Earnings, Free Cash Flow, Book Value? Which Parameters Are Stock Prices Most Correlated To?”. August 2, 2013. < http://www.gurufocus.com/news/225255/earnings-free-cash-flow-book-value-which-parameters-are-stock-prices-most-correlated-to->.
Fama and French Backtesting http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

What specific retirement options are available to employees of Unisys, and how do these options vary in terms of financial benefits, including considerations for early retirement vs. normal retirement age? In the context of the Unisys Pension Plan, what implications do these options have on long-term financial planning for employees at Unisys?

Retirement Options at Unisys: The Unisys Pension Plan provides options for normal, early, and unreduced retirement. Normal retirement is at age 65, and early retirement is available between ages 55 and 65, though benefits may be reduced for early retirement. Employees with at least 20 years of vesting service can retire without reductions from age 62. These options influence long-term financial planning as choosing early retirement may result in reduced benefits due to longer payout periods(Unisys_Corporation_Summ…).

How are pay credits calculated under the Unisys Pension Plan, and what factors might influence an employee's monthly pay credit pertaining to their Retirement Accumulation Account? Moreover, what are the potential impacts on retirement benefits if employees experience changes in their eligible pay during employment at Unisys?

Pay Credits Calculation: Pay credits under the Unisys Pension Plan were calculated at 4% of an employee’s eligible monthly pay from January 1, 2003, through December 31, 2006. Interest credits continue to accrue after this period until benefits are distributed. Changes in an employee’s eligible pay during employment will affect the total pay credits, thus impacting their retirement accumulation account(Unisys_Corporation_Summ…).

Can you explain the differences between credited service, eligibility service, and vesting service as defined by Unisys? What importance do these distinctions have on an employee's ability to access their retirement benefits, and how does each type of service contribute to the overall calculation of an employee's pension under the Unisys plan?

Service Types at Unisys: Credited service refers to the period used to calculate pension benefits, vesting service determines eligibility for receiving benefits, and eligibility service is the time required to become a participant in the plan. These distinctions are critical because credited service directly affects the benefit calculation, while vesting and eligibility service ensure employees qualify for benefits(Unisys_Corporation_Summ…).

What steps must Unisys employees take to initiate their pension benefits, and what specific information will they need to provide during the application process to ensure a smooth transition into retirement? Additionally, how does Unisys support employees in navigating this process, and what potential delays should employees be aware of?

Initiating Pension Benefits: To initiate pension benefits, employees must contact the Unisys Benefits Service Center and apply for their benefits. They must provide personal and employment details, including retirement age and chosen payout method (lump sum or annuity). Unisys supports employees through this process via their benefits service center, but delays can occur due to incomplete information or processing times(Unisys_Corporation_Summ…).

In what ways does the Unisys Pension Plan ensure protection for employees' benefits under federal law, particularly through the Pension Benefit Guaranty Corporation (PBGC)? How does this insurance work in practice, and what types of benefits are specifically covered or not covered by the PBGC for Unisys employees?

PBGC Insurance: Unisys Pension Plan benefits are protected under the Pension Benefit Guaranty Corporation (PBGC), ensuring employees receive guaranteed benefits even if the plan is terminated. However, certain benefits, such as non-qualified plans or supplemental executive retirement plans, may not be covered under PBGC(Unisys_Corporation_Summ…).

How might changes or amendments to the Unisys Pension Plan affect existing and future employees? In particular, what provisions does Unisys have in place to communicate significant changes in the plan to its employees, and what rights do employees have under ERISA if they disagree with these changes?

Impact of Plan Amendments: Any amendments to the Unisys Pension Plan could affect both existing and future employees. Unisys communicates significant changes through written notifications. Employees have rights under ERISA, including the right to challenge plan changes if they disagree with amendments that negatively affect their benefits(Unisys_Corporation_Summ…).

What considerations should employees of Unisys keep in mind regarding their benefits if they are nearing retirement age? Additionally, how can employees effectively prepare for potential changes to their health or work circumstances that could impact their retirement planning, given the options provided by Unisys?

Retirement Preparation: Employees nearing retirement should consider the timing of benefit elections, such as early or normal retirement. Preparing for potential health changes or shifts in work circumstances is essential, as these factors may alter retirement needs and benefit choices under the Unisys Pension Plan(Unisys_Corporation_Summ…).

What are the options available for Unisys employees who wish to designate beneficiaries for their retirement benefits, and how do these designations affect benefit distributions? Specifically, what criteria must be met for naming a contingent annuitant, and what restrictions might apply under the Unisys plan?

Beneficiary Designation: Unisys employees can designate beneficiaries for their retirement benefits. If a spouse is not the beneficiary, spousal consent may be required. A contingent annuitant can also be designated under certain restrictions, affecting the distribution of retirement benefits based on Unisys’ rules(Unisys_Corporation_Summ…).

How does the Unisys Benefits Service Center operate, and what resources are available for employees seeking information about their pension plans or retirement benefits? What are the best practices for contacting the Unisys Benefits Service Center to ensure that employees receive timely and accurate answers to their inquiries?

Unisys Benefits Service Center: The Unisys Benefits Service Center provides employees with resources for pension inquiries and applications. Best practices for contacting them include preparing all necessary personal and employment details to ensure timely and accurate responses(Unisys_Corporation_Summ…).

What are the most important elements of the Unisys Pension Plan that employees should review before retirement, and how can employees leverage the information provided in the summary plan description to optimize their retirement income? What role does employee education play in enhancing knowledge about these elements and ensuring informed decision-making about retirement benefits at Unisys?

Critical Pension Plan Elements: Employees should review their Retirement Accumulation Account, service years, and payout options before retirement. The summary plan description is a valuable resource for understanding how to maximize retirement income, and Unisys offers educational tools to help employees make informed decisions(Unisys_Corporation_Summ…).