The Only Thing Healthy About Big Tobacco: Big Profits

Includes: BTI, LO, MCD, MDLZ, MO, PM, RAI, VGR
by: Mike Nadel

I recently watched The Tsunami and the Cherry Blossom, a documentary about the 2011 earthquake and giant wave that devastated Japan. Tens of thousands of people were killed or injured, hundreds of thousands of buildings were destroyed, entire towns were washed away, and the country is still dealing with damaged nuclear reactors.

The film included heart-wrenching interviews with folks who lost everything they owned. As I watched, I couldn't help but notice that quite a few people were smoking cigarettes as they sifted through the rubble.

Think about that for a second: Although these men and women were now destitute and homeless, they somehow found enough yen to support their habit.

Please realize that I'm not judging them. Maybe smoking was the one thing that gave them a scintilla of comfort after the unspeakable tragedy they had experienced. This observation simply illustrates the incredible pull tobacco has on humankind. By extension, it's a commentary on the strength of tobacco as an industry -- and an investment.

If one had bought 278 shares of Altria Group (NYSE:MO) at the start of 1970 for $10,000, one would have almost 27,000 shares valued at roughly $950,000 today. Stock splits contributed mightily to that 40,000 percent gain. So did dividends, which were raised every year during that span, making Altria one of the most reliable dividend-growers ever. Oh, and that $950,000 doesn't even count the value of Altria's spin-offs of Kraft Foods (KFT) and Philip Morris International (NYSE:PM) in 2007 and 2008.

Of course, one could offer similar financial profiles of other blue-chip companies that have grown exponentially over time. But most of those companies don't produce a product that, by its very nature, kills its consumers.

Many people I loved died of cancer, so I certainly don't embrace the profit machine that is Big Tobacco. On the other hand, the investor in me doesn't ignore it, either. Philip Morris was my first purchase after I adopted the Dividend Growth strategy because of its consistently solid performance, its dividend (4.1 percent when I bought it) and its international scope. It is one of my portfolio's core holdings.

Altria and British American Tobacco (NYSEMKT:BTI) are on my watch list. I'm holding off on them only because I believe they are valued too richly to initiate positions. Philip Morris also is on fire, having reached its all-time high this week. I'm not buying more now, but I have no plans to sell anytime soon.

Having said all that, I fully respect those who refuse on principle to invest in the likes of PM, MO, BTI, Vector Group (NYSE:VGR), Reynolds American (NYSE:RAI) and Lorillard (NYSE:LO). I do sometimes wonder where we draw the line, however.

Many investors' favorite companies profit handsomely from overseas operations that pay kids pennies to work in horrific conditions. Major oil corporations pollute our environment with a seemingly endless chain of spills. Pharmaceutical firms routinely have to recall products that harm the very people they are supposed to help. Booze, soda, and fast-food companies sure aren't promoting healthy lifestyles. Big banks nearly plunged society into the Great Depression II.

And don't get me started on the companies that fire workers by the thousands even as they lavish seven-figure bonuses on top executives. The rare CEOs who are deemed incompetent enough to be dumped still get eight-figure golden parachutes just to go away.

In other words, our portfolios are bursting at the seams with immoral, unethical, unlovable companies.

Yes, Big Tobacco preys on our frailties, addictions and poor choices. Maybe if everybody rose up and refused to buy even one share of any tobacco stock, the industry would go away forever. And maybe if we all resolved to eat only salads, McDonald's (NYSE:MCD) would go out of business, too. A Bigfoot sighting on Mars is more likely than either scenario.

Altria and its ilk have raked in obscene profits for decades, and it's hard to imagine that changing for decades to come. Those of us who are ideologically able to make toxic lemonade from carcinogenic lemons might as well profit, too.

Disclosure: I am long PM.