Value Investing / Main Index / previous / next

November, 1999


Suppose you could buy an investment that paid a dividend of about 7 ½%, had a price to earnings ratio of only about 7.7, represented part-ownership in one of the most lucrative businesses in the world, with return on shareholder equity of over 46%, one of the most recognized franchises for its brands and products*, an above average safety rating from "Value Line," and a "Value Line" 3-5 year projected total return of about 120%? (*This is the company of Kraft Foods, Maxwell House Coffee, Jell-O, Kool-Aid, Oscar Meyer, Miracle Whip, Velveeta, Post Cereals, and Miller Brewing, etc.)

Suppose we added that substantial shares in this business are held by several of the mutual-fund industry’s biggest names: "Oakmark’s Sanborn, Jim Barrow (Vanguard Windsor II), Shelby Davis (Davis New York Venture), David Dreman (Kemper Dreman High Return), and George Vanderheiden (Fidelity Advisor Growth Opportunities)" (Source: "Worth," 12/99-1/00, "One Stock," pp.49-54.)?

Then suppose we sweetened the suggestion by stating that few businesses give more in charity? Except for one little thing, this company would probably win four-star citizenship awards from social-responsibility investors. Its programs benefit minorities, the hungry, the elderly, persons with HIV positive, etc.

Suppose we pointed out that this company has hardly if ever been as low in price to value as it is now, with its shares on sale at the bargain price of less than 80% of its annual revenues? Would you be interested in buying this company’s shares yourself?

But this company, the big MO, Philip Morris (recent price $25 ½) does have a teeny-weeny problem. As Oakmark’s Robert Sanborn said: "The simple fact is that people hate Philip Morris (same as earlier source)." Current and proposed legislation and suits against this company, even if all new ones were thrown out or settled out of court, are almost certain to cost the company hundreds of billions of dollars. And, of course, the company’s main product, nicotine tobacco, is now accepted to be, through its many deleterious health effects, an addictive killer of tens of millions worldwide. Further, within a few months it could begin to be regulated by the FDA as a drug.

Still, this demon corporation, directly and indirectly, is one of the country’s major taxpayers and providers of jobs. Is the government wrong to project budget deficits on the assumption that Philip Morris and other major tobacco companies will still be around like a cash cow to pay tens of billions in taxes each year? Is it wrong to subsidize tobacco farmers, as if the companies that sell the farmers’ products are bad but the growers are good, or perhaps are big MO’s troubles partly political, so that when the political winds shift, government knows the tobacco industry, along with its many voting tobacco producers and communities, will still be very much in business, so they cannot afford to be too tough on them, regardless of the recent headlines? As an investor, are these questions relevant or should one just go with the moral issues?

I do not know. So, I am not recommending MO. But if one could separate his/her investment choices from concerns of conscience and look to the very long-term for potential profits and if one were risk-tolerant and income-oriented, he/she could do far worse than to seriously consider this value investment, enjoying its fat dividend perhaps, while waiting for the winds of fortune to blow more favorably upon MO (and hope, meanwhile, that it is not just another Fruit of the Loom).


On 10/26/99, not for the first time, by any means, the Dow Jones Industrial Average got a facelift, losing four of its earlier members, Chevron, Sears, Goodyear, & Union Carbide, and gaining four more, Home Depot, Intel, Microsoft, and SBC Communications. For the first time it does now have two stocks from the Nasdaq, Intel & Microsoft. The folks at Dow Jones & Co., keepers of the D.J.I.A., say the new configuration better reflects the nation’s economy today. Perhaps not coincidentally, they probably also expect that the performance of the new Dow will be improved with those stodgy old deleted stocks removed. It is not a sure thing. In the past, folks who bought the deleted rejects would have done a little better than simply holding all of the new Dow, at least over certain intervals. What is most popular may not be most profitable.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

Value Investing / Main Index / previous / next