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Is It Really OK To "Book Profits" By Investing In Tobacco Companies?

by Dr. Len May 23, 2011

Sometimes you just have to connect the dots to understand the world around us.  And sometimes the picture those dots paint isn't one that is particularly nice. 

 

I am beyond amazed that otherwise normal, clear thinking people can turn a blind eye to the harms of tobacco when it is their turn to make some extra money.

 

The case in point is the attitude that Wall Street has about investing in tobacco companies as a good way to make a buck.  In fact, tobacco stocks are right up there on the investment list when it comes to "widows and orphans" stocks. Those are the stocks you want to be invested in because they are safe, generally do well in recessionary times, and actually pay a dividend that is real money.

 

What has set me off this time is a brief commentary in a business journal called Barron's, where a columnist I read regularly (and respect) made some comments this week about the outstanding profitability of a tobacco company that is known for their commitment to menthol cigarettes.

 

Now, cigarettes are bad enough.  But menthol cigarettes are even more problematic because certain ethnic populations and kids are attracted to them for a variety of theoretical reasons.

 

As a result of recent legislation, the FDA now has authority to regulate cigarettes, and in specific it is tackling the question of whether or not menthol should be banned as an additive.  So they convened a panel to look at the evidence as to whether or not menthol in cigarettes was harmful. 

 

The panel concluded that removing menthol cigarettes from the marketplace would in fact benefit the public health.  However, they didn't flat out recommend removal, instead leaving that for the FDA to decide. So the report wasn't exactly the ringing indictment that many were hoping for.

 

The net result was that the company who specializes in making and marketing these menthol death sticks had a rebound in the value of its stock which in turn made a lot of people rich.

 

Here is what the Barron's columnist wrote in this week's edition:

 

"Lorillard (LO) dodged a regulatory bullet, giving new life to its stock. Now maybe investors buying in at current prices are feeling a bit too invincible.

 

The dominant producer of menthol cigarettes, with its Newport brand, Lorillard stock was mentioned here favorably Jan. 17, after it had been trounced on concerns that a Food and Drug Administration panel might recommend curbs on menthol cigarette sales under an existing ban on "flavored" smokes. The stock then was at 79, down from 89 two months earlier, was yielding 5.8%, looked cheap versus its peers and was building in too-high a chance that its main product would be snuffed out.

 

In March, the FDA committee declined to suggest anti-menthol rules, and the stock took flight. It's up 50% since the Jan. 17 article at 116.37, and now is valued close to or a bit higher than peers Altria (MO) and Reynolds American (RAI), and represents fair value at best. Morgan Stanley's David Adelman, cited as a Lorillard bull at the time, with a $95 price target, continues to rate the shares Overweight, given its strong core brand, market-share opportunities and theoretical buyout potential. Yet even here, his price target is $105.

 

The shares will likely hold up should the recent rotation into defensive stocks persist, and its 4.5% yield remains attractive. Yet in a hurry, the market has quit worrying about still-nagging regulatory scrutiny of menthol. And, besides, no one ever went broke booking a 50% profit in five-plus months." 

 

I don't fault the columnist for his observations.  He is reporting on a business in a business newspaper/magazine. That business has done well.  In fact, it has done very well.

 

But would you want to "book profits" because the harmful product you have invested in may not be as harmful as some people thought?  Do you get a pang of conscience in making money off this stuff?

 

Well, you say, this doesn't really affect me.  After all, I am just a little guy not a big Wall Street investor.  I don't care what they do.

 

Ah, but you might be very surprised.  Many of you do have retirement plans of one sort or another.  And if you delved into those plans, you will find these killer stocks (pardon the pun, because they do make money) in all sorts of investments that you and your retirement plan own.

 

No matter that the products these companies make kill people--lots of people.  They have killed people in this country for decades, and now the projection is that over the next century they will kill about 1 billion people worldwide.

 

Yet Wall Street marches on.

 

You watch the investment shows, and you hear the same refrain again and again: buy so-and-so tobacco company.  Yes, the touts will always say, we don't like the product.   But man-oh-man do they make money.  So, buy the stock.

 

Have we lost our collective minds?  Is making money while manufacturing a product that is designed to addict and kill when used as directed really what business is all about?

 

I guess each of us has some product we could think of that fits that bill.  But there is no product or company where the lines are so clearly drawn as with tobacco and the tobacco companies.

 

So we merrily go down the path of hating the product and loving the companies and their profits.

 

In fairness, some organizations such as the American Medical Association will not invest in tobacco-related companies.  In a statement made in 1996, the AMA said the following:

 

"All physicians, health professionals, public health advocates, medical institutions, hospitals and all people interested in the health and welfare of our children should review their investments and divest tobacco."

 

Let me emphasize that I am someone who does believe that investing and making a profit is OK.  I am not a diehard "social investor," which means someone who steers clear of any company that has any "taint" of making or engaging in a business where there is some question of "bad behavior". 

 

But this situation is so clear cut that I really do believe that you can't just look the other way when you invest in tobacco companies because they make money and pay large dividends.  You can't cleanse your soul by saying, "Lousy product, great investment."

 

So maybe some day someone will get a conscience, make a pariah of these companies, and let them languish in the basement of investment purgatory.  Maybe someone will buy them out as a charitable process and put us out of our collective misery by using their profits to shut them down (good luck on that one, folks).

 

But no matter.  One thing we shouldn't be doing is talking out of both sides of our mouths. 

 

This isn't a good investment.  This is an investment that kills.  It is not one where you can or should in good conscience look the other way.

 

Buying this stock because it makes money and pays a nice dividend isn't safe at all.  It's deadly.  And that's the fact. 

 

You own it, you own what it does.  

 

There are some things in life that should count a heck of a lot more than making a quick buck off of someone else's misery.  Stop pretending that looking the other way is OK.   It's not.

Filed Under:

Lung Cancer | Media | Prevention | Tobacco

Comments

5/24/2011 5:15:24 AM #

chuck wejnon

why not...you book profits from desperate people seeking a "cure" that you have to deliver in 50 years...yeah lets all "fight" cancer

chuck wejnon

5/24/2011 2:16:44 PM #

Gregory D. Pawelski

Also give some thought about investing in pharmaceutical companies. Direct-to-consumer (DTC) advertising is a fact of life. The bottom line with DTC is that it works. The pharmaceutical companies have done their homework on this or they would not have investing in it on such a massive scale, according to a Washington, DC-based health care consultant.

We may not like it, but research and sales numbers prove that doctors and MCO administrators often do cave in when patients demand something persistently and strenuously. And patients can be motivated by these ads to pay out of pocket in the same manner that they are persuaded to pay for any other product. Internet DTC is a logical extension of any good product manager's media placement strategy. It's not going to go away.

The Journal of Bioethical Inquiry had already done a expose in which many drug companies use their marketing muscle to mislead physicians and consumers about the safety and effectiveness of their products. While this is nothing new, the Journal article showed how widespread this practice is and how unreliable medical research really is.

Our medical knowledge grows not in the direction that best improves our health but toward corporate profits, the way a plant grows toward sunlight. The vast majority of clinical trials are commercially funded raising the financial stakes so high that there is mounting evidence of individual scientists and corporations manipulating their findings.

A 2003 report in the Journal of the American Medical Association found that clinical studies funded by drug companies are three times more likely to conclude that the sponsor’s drug is the treatment of choice, compared to studies of the same drug that were not commercially funded.

The disturbing conclusion is that most of the evidence in what doctors believe to be evidence-based medicine is nothing more that infomercial masquerading as dispassionate science.

Gregory D. Pawelski

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About Dr. Len

Dr. Len

J. Leonard Lichtenfeld, MD, MACP - Dr. Lichtenfeld is Deputy Chief Medical Officer for the national office of the American Cancer Society.

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