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Disclaimer: Trust No One
As with medical advice, take all postings with a healthy dose of salt (unless you're Type A, of course). Take no action without your own independent and thorough investigation. Some people may not consider making you rich their ultimate goal.--gb
- By far the most common screen, according to the Social
Investment Forum, is simply not investing in tobacco‹84 percent of socially responsible portfolios rule out the stocks of death-stick makers. . .
Actually, I'm enough of an immoralist to think that smoking, drinking, and gambling are not only not the most pressing social problems in America
today, they even have their charms.
- This page lists 25 tobacco-related shareholder
resolutions planned for the 1999 proxy season by religious investors affiliated with the Interfaith Center on Corporate Responsibility,
as of January 1999.
- We
sense a split in the industry over whether to embrace the concept of a new settlement with the federal government as a vehicle by which
to bring closure to this litigation wave. Over the next few weeks, we expect industry CEOs and their lawyers to open discussions with
plaintiff counsel Richard Scruggs and DOJ lawyers, to assess the pros and cons of a new federal settlement. . . Conceptually, the federal
settlement vehicle pitched by Scruggs, combined with the AG settlement, would get the industry close to the legal certainty envisioned by
the June 20 accord. . . We expect the industry to cede limited FDA jurisdiction -- which could be the hook that convinces the health
community to get behind a new settlement. . . A DOJ settlement would not require Congressional approval, and would likely be
welcomed by Republicans who oppose both raising excise taxes and efforts by the Administration to take its average 60% share of the
state AG settlements.
- Will Philip Morris shares keep smoking? YES "It has a great business and will outperform the market." -- David Adelman, Morgan Stanley Dean Witter . . . NO "They're going to underperform whatever the market does." -- Jack Maxwell, Davenport & Co.
- Once the appeals are exhausted and reality sets in, we believe the industry will agree to a $150 billion-$200 billion settlement
with the federal government for smoking-related claims, where the industry would get credits for claims paid out on personal
injuries. This plan, pitched for months by Dick Scruggs, would give the industry the closure envisioned by framers of the June 20
accord. . .Our Washington sources say that DOJ is 6 -12 months away from bringing its claim. . . The biggest obstacle to a new
settlement with the federal government that gives the industry credits for personal injury claims is again the renegade issue.
- Our
current ambivalence toward tobacco stocks reflects our continuing belief that valuations will remain stuck in their narrow ranges
established after the AG settlement was announced. Near-term, only Gallaher and Brooke Group are likely to rise. . . Clinton's
proposal to raise federal excise taxes by $.55/pack (on top of $.15/pack increase already passed) may again make the industry shy
about showing strong results until the proposal dies . . . We believe BAT's acquisition of Rothmans is likely to cause MO to buy
GLH, triggering a global consolidation that can fuel new multiple expansion . . . We rate Philip Morris, RJR, and UST outperform.
We expect all tobacco stocks to remain stagnant at least through early-Spring, given the uncertainty associated with the Engle, Ohio
Iron Workers, Henley, and Karney trials, offset by likely positive 1999 revisions as U.S. volume forecasts are increased, and further
events that reinforce the thesis that an industry shake-out is underway. . . We expect Philip Morris to acquire Gallaher to avoid losing
world market share leadership to BAT . . . The RN/Icahn proxy fight will kick off in mid-March.
- Will Philip Morris
shares keep smoking? YES "It has a great business and will outperform the market." -- David Adelman, Morgan Stanley Dean
Witter YES Philip Morris's risk profile has come down demonstrably. . . NO "They're going to underperform whatever the market
does." -- Jack Maxwell, Davenport & Co. NO When there were only 20 or 30 lawsuits, analysts were telling everybody the world
was coming to an end. Now, despite the state settlement, the company still faces 850 suits from consumers and corporations.
- Fidelity Investments said its giant Magellan Fund cut Philip Morris Cos Inc. from its top 10
holdings in the fourth quarter, and replaced the tobacco stock with America Online Inc. . . ``I would anticipate that AOL will power ahead and
Philip Morris will decline as portfolio managers and individual investors follow the lead of these all-star managers.''
- When I was a little girl I remember hiding my grandfather's cigarettes hoping he would stop smoking. He didn't, and soon after I
finished college we found out that Papa, which is what I called my grandfather, had lung cancer. . . Whatever your beliefs, life is all about
choices. If you're going to invest, know what you are buying. . . I know that when I retire I don't want to be sitting poolside in some condo
complex in Florida knowing I paid for the place by investing in a company that sells cigarettes.
- Ambiguity about the
likely consumption impact on 1999 profits, the chaotic wheeling and dealing going on at retail, and the complex nature of the accrual accounting
process for the MASTER SETTLEMENT AGREEMENT has led investors to attach a new uncertainty discount on valuations. We sense growing frustration
about the lack of closure on litigation following the AG settlement. . . Instead, managements at both RJR and PHILIP MORRIS have been vague
about plans for stripping the tobacco taint from non-tobacco operations. This, in turn, has led many investors to conclude that spinoffs may
never happen. . . We believe ICAHN can win the proxy fight if he hires a first class consumer products CEO to run his slate; vows to hold onto
his RJR stock until after the spinoff; and stands clear of BROOKE CEO BENNETT LEBOW, who dual RN/MO shareholders still don't trust. The wild
card is whether Philip Morris comes to RJR's rescue, given PM's preference for the status quo and the devil they know who they are beating, vs.
the devil they don't know who may outsmart them.
- But
the list has something for almost everyone . . . and--for the politically incorrect crowd--tobacco seller LOEWS CORP.
- Philip Morris Cos. Inc. shares could hit $70 if in 1999 the
diversified cigarette maker spins off its Kraft food business, which could be worth $25 per share, Barron's said in its Dec. 28 edition.
The report was an analysis of stocks considered ``The Dogs of the Dow,'' or the 10 stocks in the Dow Jones Industrial Average that
have the highest dividend yields.
- PHILIP MORRIS was another roller-coaster stock in 1998. . . Bulls on PHILIP MORRIS argue that the stock is attractive at 16 times projected 1999 profits. It boasts a 3.4% dividend yield, and the company's aggressive sharere-purchase program is back in place. Some are betting that Mo will spin off its Kraft food business in 1999, which could be worth $25 per Philip Morris share. If that should happen, the stock could hit 70.
- Company Price 12/23 Dividend Yield P/E RATIO* Comment
- Philip Morris 54 5/8 3.2 16 Big issues for '99: Will Big Mo spin off Kraft? How much will cigarette sales fall? [This graph only]
-
Asked if the bank's chain-smoking chief executive, Mervyn Pedelty, would follow the bank's lead and avoid tobacco manufacturers as a
New Year's resolution, a spokesman said: "The bank will not invest in tobacco-makers because of their policy of dumping cheap
cigarettes on the Third World, which have few restrictions on tobacco advertising, but we have no stance on individuals and, besides,
Mervyn doesn't smoke in the office."
- The CITIZENS INDEX fund, based on the Citizens Index created by Collier and her staff, consists of 300 companies that have
passed the firm's social and environmental screens. Those screens include areas such as the environment, alcohol and tobacco, gambling,
nuclear power, and treatment of animals. According to Collier, Citizens Funds' social screens are among the most stringent in the
industry.
- We
believe odds of Icahn winning a proxy fight against RJR in the Spring are at least 50/50%, although much depends on the quality of his
slate, Philip Morris' efforts to convince dual RN/MO owners to back current RN management, and RJR's own value-unlocking
initiatives. The major risk with betting on Icahn is that "registrant may dispose of the shares at any time" (13-D filing).
- Owens Corning's
settlement of 176,000 individual asbestos claims for $1.2 billion allows us to reiterate our two favorite reasons for owning tobacco stocks: One,
class actions are not appropriate in personal injury cases; two, the cost of funding an Owens-Corning-type settlement by paying off every
smoker who contracts lung cancer (180,000 new cases per year) is $.04/pack.While we doubt the industry is prepared yet to go this route of
building the costs of personal injuries into every pack of cigarettes, a massive settlement to fund injuries as they are incurred, funded with price
increases, would remove the risk of enjoinment of spinoffs and other value-unlocking actions by plaintiff counsels desperate to be paid after
years of unsuccessful tobacco litigation
- Consumption declines appear to be stabilizing, following a year of rapid price hikes. . . the "Big 3" have
ceded considerable private label share to LIGGETT and other renegades, who have passed along little of the recent price hikes. . . The
price gaps between MARLBORO and DORAL ($.61/pack) and between Marlboro and lowest-priced brands ($.80/pack) are at their highest
levels since Marlboro-Friday. . . PHILIP MORRIS (+0.7pt), LORILLARD (+0.3pt), and the renegades (+0.4pt) continue to gain share from
RJR (-0.4pt) and B&W (-1.0pt). . . Smokers, rather than quitting, continue to search out retailers in the gas and convenience
classes of trade who have cut margins on cigarettes to 5-8% or to state minimums, to build traffic. This pricing disparity among
different classes of trade is intensifying."
- We believe the U.S. Supreme Court will again send a strong message that class actions are not appropriate for asbestos personal
injury claims -- and by extension, tobacco claims -- when it issues its ruling in Ortiz v. Fibreboard (a.k.a. Ahearn) this Spring. A
ruling decertifying Ortiz, in combination with last year's 6-2 Amchem ruling, could sound the death knell for tobacco
class actions. . . Our conviction that the Florida Supreme Court will decertify Engle . . . We believe all tobacco companies will
follow BAT’s lead and separate tobacco from non-tobacco operations, once the Engle class action is resolved, and once the
industry can demonstrate that the domestic tobacco business remains viable following the $250 billion AG settlement. . . The impeachment
snowball rolling through Washington is likely to be favorable for tobacco stocks, since a Senate trial to remove the President (which has
low odds of succeeding, given 2/3 vote needed) should keep tobacco off Washington's radar screen at least through Clinton's state of the
union address (1/19).
- Sin or fun? In 1979, Burton D. Morgan formed an investment partnership for family members with an interesting proposition. He would invest only in stocks involved in vices such as smoking, gambling, drinking and fornicating. The fund was called "Sin Shares." Four years later, he took the fund public under a title the SEC found less provocative: Morgan Funshares. I drew readers' attention to Funshares in this column 2 1/2 years ago -- not so much for the content of the portfolio as for Morgan's investment philosophy, compatible with my own. "Buy low and never sell," he told me. "That's the key. I'm sorry I waited so long in life to find this out."
- The two catalysts that can lift tobacco stocks out of their recent doldrums: 1) Evidence that companies are committed to separating tobacco from non-tobacco assets, once the Engle class action is resolved, and once the companies establish that the industry can amply satisfy its obligations under the new AG settlement; 2) Confirmation that 4Q will indeed be a big bath quarter, which would reduce 1998 estimates to realistic levels, and allow double-digit earnings growth to resume in 1999. . . The Engle trial is now the biggest near-term risk facing investors. We believe odds are high the industry will lose the Phase I common issues trial, and be assessed a punitive damages multiplier that could be applied in Phases II and III. . . The wild card in RN's valuation is a likely proxy fight in front of the May 12 annual meeting (filing deadline March 12), which could force RJR to unveil its value-unlocking plan by Spring. . . Our read on this week's U.S. Supreme Court Ahearn arguments: The court is likely to again rule that class actions are not appropriate for asbestos claims, which would be true also for tobacco claims (ruling by Spring). . . Why spinoffs aren't fraudulent conveyances.
- Now that the tobacco
industry has settled health care cost-recovery and consumer fraud claims with all 50 states, the industry and its investors are looking
forward to 1999 with a renewed sense of confidence. Bankruptcy fears have turned to hopes of restored double-digit earnings growth
and even tobacco company spinoffs in 1999. Investors who weathered the storm of the McCain tobacco bill in Congress last spring
have since seen a 60 percent rise in the S&P Tobacco Index.
- With management suggesting that the spinoff of Nabisco may be delayed until 1999/2H, some shareholders may push an
alternate plan to unlock value: Sell domestic tobacco with attendant liabilities to highest bidder, spin off Nabisco, then merge tobacco
stub (Reynolds International, plus cash from sale of RJR USA) with BAT or another tobacco company. This value-unlocking plan was
implemented successfully by American Brands -- now Fortune Brands in selling American Tobacco to BAT in 1994 . . . Most likely
buyers of RJR's domestic business: Brooke Group's Liggett, Japan Tobacco, Rothman's, or smokeless manufacturer who wants scale . .
. Looming proxy fight with Icahn could force management to unveil some plan to unlock value -- or lose . . . BGL would have to
guarantee RJR that if tobacco liabilities bankrupt a combined RJR/Liggett after the sale, and plaintiffs come after RN (or whatever is left
of RN), BGL would somehow pay the claimants off.
- We have again cut 1998 estimates . . . to reflect our belief that the industry has now come to view 4Q as a "big bath" quarter,
and will work to eliminate the trade inventory overhang by year-end. . . Further multiple expansion seems limited until we get clear evidence
that one or both companies will separate tobacco and non-tobacco operations. Neither is likely to talk about spinoffs until after the ENGLE
Phase I trial (end of January). Increasing prospects that LEBOW could use BGL stock to take control of #2 RJR absent a Nabisco spinoff may
push PHILIP MORRIS to act first. One factor that may lead RJR to outperform MO for perhaps the first time ever is the looming
RJR/ICAHN/LEBOW proxy fight . . . Because RJR's stock performed dismally again in 1998, . . . management must go into this proxy fight with
a clear plan for unlocking value -- or will lose badly. Likely plan: Merge RJR International with a partner; RJR keeps a percentage; then spin
off Nabisco
- Sources tell us the Liggett payoff came in response to last minute objections by the Massachusetts AG and a handful of other states that
Liggett, as a non-signatory, could be bought by RJR or one of the other majors (except Philip Morris), who could then use Liggett¹s more
favorable terms to reduce its own obligations. . . Philip Morris could add significant value to these three brand franchises, which are already
large PM cash generators overseas. L&M is the world¹s third largest brand, outselling RJR¹s Winston and Camel brands combined. . . We
expect Liggett to forego some of the expected $.40/pack price hike to gain additional share. . . We expect LeBow¹s Brooke Group to use its
now clean balance sheet (proceeds to retire $150 million of Liggett debt maturing in February 1999 and $150 million of BGL's $230 million
debt) and newly inflated stock as currency to make a new run at RJR
- While yesterday's monstrous price increase was largely anticipated, it should convince investors that 1999 domestic volumes will be
down only moderately (our estimate 6%). . .The effect of an immediate and sharp deload now -- we estimate 17 billion sticks must come
out of inventory -- will be to depress 4Q and FY 1998 estimates, while boosting 1999 numbers. . . For Philip Morris, this should bring
most analysts back to 10% EPS growth in 1999 and beyond
- David Ward thought ``socially responsible''
investing was financially irresponsible -- until he was convinced to give it a shot. The Fort Myers, Fla., investor learned he could buy
mutual funds that avoided ties to tobacco, alcoholic beverages or gambling -- which he and his wife had opposed -- yet not sacrifice profit
for principle. He chose Citizens Index Fund, which was started in 1995 by Portsmouth-based Citizens Funds.
- We believe that PHILIP MORRIS' guidance offered to some analysts of 10-12% volume declines in 1999, and corresponding estimate cuts of 7-8% is greatly exaggerated. The timing of the guidance may be to convey the message that this deal will cause considerable pain . . . Liggett's rejection of the new deal will not cause the accord to blow apart. . . LEBOW probably wants to remain a thorn in the industry's side and keep uncertainty high about Liggett price cutting to prompt a payoff to LIGGETT to join this deal. This, of course, would allow Liggett to retire its $150 million debt maturing in February -- allowing Liggett to survive.
- But Physicians For A Smoke-Free
Canada, or PSC, which includes about one in 37 Canadian doctors, believes investors can have their cake without any second-hand smoke.
The group suggests in a report released yesterday that pressure on fund managers to dump tobacco stocks could lead companies to get out
of tobacco, or split their companies so that investors could just invest in non-tobacco businesses. . . "That's why we are providing an Internet
resource to support tobacco-free investments.'' . . www.smoke-free.ca
- [This report features the payment schedule; not included in the report is Black's expectation that Clinton will embrace the deal by 3:00PM] The all-in cost of this 47-state settlement will be reported in the press at $206.3 billion. However, this represents 26 (rather than 25) years of payments, applies a 3% inflation factor to the five initial payments ($2.4 billion per year), and excludes the $100 million UST settlement. Apples-to-apples vs. the June 20 accord ($368.5 billion over 25 years), the all-in-cost of this deal is $197.6 billion.The incremental pricing needed to pay for this 47-state settlement is $.35/pack cumulatively over four years, with $.30/pack in pricing needed by January 1, 1999 if the industry accrues and increases prices for the payments due in 2000/1Q in 1999. . . Our sources say that UST has negotiated a separate deal that requires $100 million in initial payments ($20m upfront, $20m each year 2000-2003), but no ongoing payments
- But now there is an upstart index fund that has not only beaten most mutual funds, but also has had its way with the S&P index as well. The fund is Citizens Index, a $350 million equity fund that aligns its principal with its principles. That's right, it's a socially responsible index fund and it is outperforming the S&P.
- The public's collective apathetic shrug toward tobacco as an issue is likely to push tobacco off the political radar screen once and for all. This week's defeats of anti-tobacco hardliners Humphrey (MN) and Harshbarger (MA), and a razor thin victory margin (13,000 votes of 7 million cast) on California's Prop 10 should send the clear signal that tobacco is a non-issue to the electorateWhile we are concerned that three of the eight AGs who negotiated the AG deal -- Lungren (CA), Vacco (NY), Norton (CO), all who are Republicans -- are effectively lame duck AGs through year-end, we detect a sense of urgency now that this deal be wrapped up before Thanksgiving. This implies a pre-sell of the deal to the AGs next week, with commitments within 5-7 days
- The Domini 400 Social Index, an index of "socially responsible" stocks, again outperformed the broad Standard & Poor's 500 index in October. The Domini 400 gained 8.87% for September, while the S&P 500 grew 8.10%. The social stock index also led the broad index in year-to-date returns, with a 17.03% gain through the end of September, compared to the S&P 500's 14.72%.
- The University of Wisconsin System's trust fund should be invested in socially responsible companies, its Board of Regents was told at its annual investment forum. . . Many of the nearly 20 speakers zeroed in on Philip Morris Cos., the largest holding of the UW trust fund. . . "It's kind of a no-brainer. It's tobacco. People die," said Judy Gump, a UW-Madison graduate and teacher at Madison Memorial High School. "Philip Morris markets to kids. Everybody knows Philip Morris markets to kids."
- The public's collective apathetic shrug toward tobacco as an issue is likely to push tobacco off the political radar screen once and for all. This week's defeats of anti-tobacco hardliners Humphrey (MN) and Harshbarger (MA), and a razor thin victory margin (13,000 votes of 7 million cast) on California's Prop 10 should send the clear signal that tobacco is a non-issue to the electorateWhile we are concerned that three of the eight AGs who negotiated the AG deal -- Lungren (CA), Vacco (NY), Norton (CO), all who are Republicans -- are effectively lame duck AGs through year-end, we detect a sense of urgency now that this deal be wrapped up before Thanksgiving. This implies a pre-sell of the deal to the AGs next week, with commitments within 5-7 days
- One shortcoming of the Domini screening process, at least for some
investors, is that it ends at the company gate. The company's ties to suppliers, joint-venture partners, customers, and subsidiaries, while
noted during the evaluation, are rarely enough to warrant removal from the index. That's why H.B. Fuller, based in St. Paul, Minn.,
remains on the index even though it sold a shoe adhesive containing a toxic solvent in Central America that was being sniffed by children,
and even though a small percentage of the company's revenues come from the sale of adhesives to the tobacco industry.
- Cigarettes may have a bad image, but Australian tobacco stocks have produced a stellar performance in a market that has been less than forgiving to an array of sectors. The two listed tobacco stocks, Rothmans and W.D & H.O Wills, have seen their prices appreciate by 41 per cent and 100 per cent respectively. This compares very favourably to a 4.3 per cent fall in the All Ordinaries since the beginning of the year.
- We now understand why it has taken so long for this deal to surface: The parties are trying to assemble a critical mass of 30-35 AGs in a position to embrace the deal when it is announced, to send a clear message to AGs who might be on the fence or hostile to the deal that the settlement offer is final, and that it would be futile to attack the deal as not strong or expensive enough.
- For your European market-survival kit, be sure to pack plenty of cigarettes, some food and a few Bunds. Few strategies have worked better since European shares began their 31% nose dive on July 20. Most investors have been bitten by banks, stung by electronics, and hammered by oil and exploration firms; others, however, have enjoyed the balm of so-called defensive plays like Britain's IMPERIAL TOBACCO GROUP.
- While a Few Stock Groups Escaped Best-performing stock groups in the third quarter: 3rd-qtr. Sector change. . . Tobacco +13.4%
- Lead Story: Stock Prices Firm on String of Court Victories
- Stock Watch: Philip Morris Boosts Dividend; RJR Back in S&P 500
- Companies and Investors: Investor Profile: Harvard University
- Divestment Activity: Minnesota Approves Partial Divestment Action
- IRRC Survey: IRRC Surveys Institutions on Tobacco Investment Policies
- Shareholder Activism: New Resolutions Expected for 1999 Proxy Season
- Legal Issues: Tobacco Companies and States Resort to 'Plan B'
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