Heading out of town for winter break…
Tag: MO
Makes a nice case that either Phillip Morris (PM) is under prices OR Altria (MO) is over priced.
Makes a nice case that either Phillip Morris (PM) is under prices OR Altria (MO) is over priced.
A win for the paint industry in the latest consumer product litigation scam.
Jane Genova reports:
Today, MEALEY’S LITIGATION REPORT issued a special e-mail bulletin on the long-awaited Wisconsin Supreme Court ruling in “Ruben Baez Godoy v. E.I. duPont de Nemours and Co., (DD) et al.”
MEALEY’S editor James Cordrey reports, “The Wisconsin Supreme Court today unanimously affirmed an appellate court ruling and held that lead pigment is not defectively designed, dismissing a lead-poisoned boy’s claims for strict liability and negligence against the former manufacturers of white lead carbonate pigment.” The appellate court had affirmed the circuit court’s ruling.
As the defendants have kept declaring in this litigation, the Court agreed that “the Circuit Court correctly concluded that the complaint failed to state claims for defective design. A claim for defective design cannot be maintained here where the presence of lead is the alleged defect in design and its very presence is a characteristic of the product itself.”
Cordrey points out that WI SC also said that even though the feasibility of an alternative design can be considered when evaluating a design defect claim, it isn’t a requirement. He goes on to explain that when the ingredient can’t be designed out of the product, the Court noted that the Restatement [Second] of Torts instructs that although other claims may be asserted, the proper claim is not design defect.
Cordrey will expand on this analysis in the July edition of MEALEY’S LITIGATION REPORT: LEAD. Meanwhile copies of this and all other litigation documents are available for a fee from MEALEY’S.
I had for a while held Sherwin Williams (SHW) shares and was encouraged when they were finally victorious in the Rhode Island litigation. But as housing continued its decline and the legal environment in other locals became more questionable, I sold my shares. Shares have held up very well considering the potential litigation risk (think asbestos). My assumption is that investors agree that the litigation on its face is a farce BUT, that does not mean that plaintiffs can’t win one here and there. Any win of any significance could lead to a cascade of private suits.
As State’s suffer extreme budget shortfalls, I would not be surprised if more suits are filed in a “lottery mentality”. AG’s have nothing to lose and everything to gain especially if they can force settlements. To this point paint makers have resisted and fought tooth and nail very successfully for the most part case by case.
Sherwin is clearly the class of the group from just an operational perspective. It is a great company with great management. The current legal environment for it, and others (think Altria) seems to be turning and not in a good way.
Other public companies usually involved in the suits would be NL Industries (NL) and DuPont (DD).
Disclosure (“none” means no position):None
Categories
Buy and Hold Dead? Um…No
Been hearing this a ton lately. Problem with the statement is it taking a blanket approach and doing that in anything, is wrong. Those who typically espouse it say that the S&P 500 has done a round trip over the past decade so those who “bought it” have made no money. But, do most of us “buy the S&P”? No one I know does.
I’m going to take a look at the longest holding I ever had…Altria (sold last December).
I bought it in late 1999 in the midst of the “Master Settlement” and Chapter 11 fears for them. The buying thesis was simple:
1- Addicts will buy their products
2- They can’t go Chapter 11 because those suing them (States) need the money they provide
3- Because of that, their long term health was assured.
The purchase price for Alria was $21.65 a share and when I sold it was $16.75. In addition to that I received $21 a share in the Kraft (KFT) spin-off (sold immediately), $48 a share in Phillip Morris International (PM) shares (still held and today worth $42).
Oh, and over the 9 years I held it I received $23.25 a share in dividends.
Here is a 10-yr. chart of Altria.
Now the temptation would have been to dump it in 2003 as it fell and then even again in 2004 as it dipped. But why? Just because the price fell?
Questions to have asked yourself then:
- Were the fundamentals of the tobacco business impaired?
- Did the legal environment deteriorate?
- Did management do something that changed the earnings profile of the company in a negative way?
The answer to all of those questions was no and in reality the legal environment improved steadily in those years to the point then CEO Camilleri said prior to the PM spin, “the current legal environment is the best we have seen it in years”.
So in 9 years here is the tally:
That is a 18% annual return over those 9 years for doing…….nothing…
A very similar scenario has unfolded with McDonalds (MCD) since I first bought during the “Mad Cow” scare. While not as extreme, and I did make the HUGE mistake of selling Chipolte (CMG) shares when I received them in the spin, it has been a fantastic investment.
Has the market done a round trip the past decade? Yes. Are there plenty of companies whom over that time have gone up/down and then back to start? Yes. BUT, if you buy it low enough and pay attention to its business environment/prospects to determine your selling time, you can avoid many of the losses.
Altria’s business environment never deteriorated over the 9 years and in fact dramatically improved over where it was at purchase. I sold it in December because I felt that changed and PM International has a superior one. The same can be said of McDonalds, it environment is still improving with its very successful move into coffee and consumer trade to value.
Have it missed any? Sure. Dow Chemical (DOW) comes to mind. I got caught up in the Rohm & Hass/Kuwait deals and their potential benefits while the surrounding business climate deteriorated. The stock fell to a low of $6 from $50’s in 2005 (my original cost was $26 in 2002). While I lost a bunch of unrealized profits, between $8 and $9 in March of this year I was able to lower my cost basis to $14 with several purchases. Again, when we add in $9.32 in dividends received since 2002, we are still up nicely, although not nearly as much as before..not nearly.
Am I selling Dow now? No. The Rohm deal is done and the business environment, while I missed the downside, looks to improve going forward. This will still turn out just fine eventually IMO, it will just take some time. We’ll see…
Beware of “X investing theory is dead” proclamations. There are plenty of value folks who do great, plenty of day traders who do great and plenty of swing/momentum ones that do. There are also plenty of all three that do awful.
Find good ones in the style that fits you and get to know them. Blogs & twitter allow unprescedented communications between investors, take advantage of it.
Disclosure (“none” means no position):Long PM, MCD, DOW, none
Received Phillip Morris International (PM) shares from Altria in last years spinoff. Due to the deteriorating US legal environment for tobacco recently, I sold my long time holding Altria (MO) in December and now only still hold PM shares.
I consider PM the company of the two with better longer term prospects and business environment.
One overlooked investment thesis for PM is that it is a hedge against the general devaluation of the US dollar. PM sells tobacco in other nations in their local currencies, it then convert those currencies to US dollars for reporting purposes. As the dollar falls in value, those conversions yield more dollars for shareholders.
For those who do not want to go through the whole presentation, slide 67 is the applicable slide. The comments were:
In August last year, we raised our dividend by 17.4% to an annualized rate of $2.16 per share and we have confirmed our willingness to exceed our target 65% dividend payout ratio in 2009. At the current stock price, our dividend provides an attractive yield of approximately 5.2%.
We have completed over half the $13 billion two year share repurchase program that we initiated in May 2008 and are one of the few major companies in the world to have maintained their share repurchase program throughout the current financial crisis.
All in all we expect to return some $9 billion in cash to our shareholders during 2009.
So we have a 5% dividend yield and a company growing earnings 10-12% annually. Based on that earnings growth, we should see a dividend next year or $2.43 a share for a current yield of 5.7%. PM did say they may consider exceeding that (65% of earnings) this year which would boost it higher.
Disclosure (“none” means no position):Long PM
Categories
Tobacco and The FDA: A Partnership
Here is a flashback to a post I wrote in April 2008.
Let’s take a look at the FDA Tobacco Bill and see what effect it may have on the industry.
The bill would effect tobacco products manufactured and sold primarily by R.J. Reynolds Tobacco (RAI), Loews Corp.’s Lorillard Tobacco (LTR), Vector Group Ltd.’s Liggett Group (VGR), British American Tobacco (BAT) and Altria (MO) in the US.
The bill will enable the FDA to prevent the introduction of new cigarette brands.
“`(1) NEW TOBACCO PRODUCT DEFINED- For purposes of this section the term `new tobacco product’ means–
`(A) any tobacco product (including those products in test markets) that was not commercially marketed in the United States as of June 1, 2003; or
`(B) any modification (including a change in design, any component, any part, or any constituent, including a smoke constituent, or in the content, delivery or form of nicotine, or any other additive or ingredient) of a tobacco product where the modified product was commercially marketed in the United States after June 1, 2003.
`(2) PREMARKET APPROVAL REQUIRED-
`(A) NEW PRODUCTS- Approval under this section of an application for premarket approval for any new tobacco product is required.”
Now, what could cause a new product to be denied?
“(2) DENIAL OF APPROVAL- The Secretary shall deny approval of an application for a tobacco product if, upon the basis of the information submitted to the Secretary as part of the application and any other information before the Secretary with respect to such tobacco product, the Secretary finds that–
`(A) there is a lack of a showing that permitting such tobacco product to be marketed would be appropriate for the protection of the public health;”
In other words, do not expect a new cigarette to be introduced in the US. What is here now is what will be here 20 years from now. If you are Altria (MO), and have over 50% market share, this is very good news indeed. It also means that recently introduced low cost products may come under review and alterations to the product may become necessary that will substantially raise the cost of it. A shrinking cost basis for consumers between brands, will most likely cause many to “trade up” to the premium brand.
Currently, any litigation risk in cigarettes surrounds alleged fraud. Fraud in marketing and fraud in labeling. What will the FDA bill do? It completely removes the risk of litigation for fraud and allows the tobacco companies to tell consumers that they are complying with government product safety standards. By doing this they assure a safer product produced under the guidance of the FDA. Let’s look.
Since most of the current litigation is of the “Light” cigarettes, lets go to that section.
SEC. 911. MODIFIED RISK TOBACCO PRODUCTS.
`(a) In General- No person may introduce or deliver for introduction into interstate commerce any modified risk tobacco product unless approval of an application filed pursuant to subsection (d) is effective with respect to such product.
`(b) Definitions- In this section:
`(1) MODIFIED RISK TOBACCO PRODUCT- The term `modified risk tobacco product’ means any tobacco product that is sold or distributed for use to reduce harm or the risk of tobacco-related disease associated with commercially marketed tobacco products.
This means FDA approval of all claims on “light” and “low tar” cigarettes. This clause means that FDA approval of these cigarettes does give their stamp of approval that “light” is “safer”.
What are the conditions for approval?
Approval-
`(1) MODIFIED RISK PRODUCTS- Except as provided in paragraph (2), the Secretary shall approve an application for a modified risk tobacco product filed under this section only if the Secretary determines that the applicant has demonstrated that such product, as it is actually used by consumers, will–
`(A) significantly reduce harm and the risk of tobacco-related disease to individual tobacco users; and
`(B) benefit the health of the population as a whole taking into account both users of tobacco products and persons who do not currently use tobacco products.
They do not have to be “safe”, just “safer” than the current choice to legally be called “light”.
The bill also requires the FDA to inspect tobacco sellers for counterfeit cigarettes and report instances to the applicable Attorney General “immediately”. This has been a very large issue for domestic manufacturers as foreign “knockoffs” have entered the country and cost Altria millions of dollars in annual revenue. The bill effectively makes the FDA the “sheriff” and forces them to protect the market.
Could the FDA ban tobacco? The bill says no.
“`(3) POWER RESERVED TO CONGRESS- Because of the importance of a decision of the Secretary to issue a regulation establishing a tobacco product standard–
`(A) banning all cigarettes, all smokeless tobacco products, all little cigars, all cigars other than little cigars, all pipe tobacco, or all roll your own tobacco products; or
`(B) requiring the reduction of nicotine yields of a tobacco product to zero,
Congress expressly reserves to itself such power.”
Will Congress ban tobacco? Never…..How will the States ever replace the billions of dollars in tax revenue they receive from taxing them?
What the bill does is stop the FDA from banning tobacco and forces them to endorse it…..
The final bill passed yesterday (it is not materially different that the previous bill above)and cheers were heard from many in the Tobacco industry. That ought to have been clue #1, that this was not as advertised by those in government.
It essentially creates a government sponsored Tobacco Cartel in the US that cannot be broken into by outside players. Personally, I do not care either way. I am no longer an Altria shareholder, preferring to holds my Phillip Morris International (PM) share received in the spin off from Altria.
The government can’t kill Tobacco as they rely on it too much for tax revenues. As a matter of fact, states who are receiving master settlement money have already mortgaged the future there selling bonds based on that revenue. The final bill mandate the FDA cannot remove nicotine from cigarettes so they will still be just a addicting. The bill “reduces advertising” it claims. So what? They hardly advertise now? But, hey, at least the warning labels will get bigger because we know people pay attention to those…yeah..
This bill will only serve to strengthen Big Tobacco in the US and considerable expense to US tax payers and is yet another example of why government needs to stay out of business.
Disclosure (“none” means no position):Long PM, none
Categories
Another Loss for Tobacco in Court
I have a feeling this is but the tip of an iceberg for Altria (MO)….
A major blow for the tobacco industry, reports THE WALL STREET JOURNAL, “A jury decided Thursday that a longtime chain-smoker’s death from long cancer was caused by nicotine addicton, a potentially costly loss for tobacco giant Philip Morris and an important test for thousands of similar Florida lawsuits.”
This was the first of 8000 such personal-injury cases. In 2006, the FL Supreme Court had upheld the complaint that the tobacco industry had knowingly sold potentially harmful products while hiding the health risks. However, it also tossed the $145 billion jury award in a class action lawsuit. As a result, plaintiff attorneys began filing personal injury complaints.
In this particular case, filed by Elaine Hess a widow of a smoker, the attorneys are expected to request millions of dollars. For BigTobacco, this could be bankruptcy by a millions of cuts.
When I sold Altria in December of last year at the time I said:
Altria. It has been a wonderful investment bought back in 2000 for a now adjusted $4 a share it has produced shares of Kraft (KFT), sold, and Phillip Morris International (PM), still held. It has also produce thousands of dollars in dividends over the years. I will hold PMI as it yields 5%, has great growth prospects and little ligation risk.
But, I fear things are going to take a turn for the worse here domestically and with already owning shares of the international tobacco operations, it is time to exit. Will the upcoming purchase is UST (UST) help earnings? Yes. Will it offset the upcoming deluge of lawsuits against the company? Not so sure. Having Tom Daschle at HHS is also a bad omen. Whatever grand plans he has for universal health care will undoubtedly be funded in part on the back of cigarette companies through litigation or its customers through oppressive taxes.
The irony of the tax argument is that it is a “negative” not “progressive” tax. We know the less education a person has, the more likely they are to smoke. We also know that those with less education tend to be lower income earners. It this case, raising taxes to these addicts decreases their disposable income to fund grand ideas of health care for all. Nice…”soak the poor”
Now Daschle has flamed out, but insert whomever is next and the song is the same
State governments starved for cash will not “kill the golden goose” and bankrupt tobacco companies (that and tobacco lawyers are infinitely smarted than legislators). BUT, they also will be determined to leave little behind for shareholders….
Hypocrisy at its highest
Disclosure (“none” means no position):None
Visit the ValuePlays Bookstore for Great Investing Books
Categories
Selling Altria…..It’s Been Great..
No, it has nothing to do with any “moral objection” to selling cigarettes. I fear the legal landscape is bout to change in a very negative way..
First, Altria said yesterday:
In a 5-4 decision, the Supreme Court today ruled that a lawsuit involving “lights” cigarettes brought under the Maine Unfair Trade Practices Act was not barred by federal law.
“While we had hoped for a dismissal based upon federal preemption, it is important to note that the Supreme Court made no finding of liability. We continue to view these cases as manageable, and the company will assert many of the strong defenses used successfully in the past to defend against this very type of case,” said Murray Garnick, Altria Client Services senior vice president and associate general counsel, speaking on behalf of Philip Morris USA.
The Court said that the plaintiffs “still must prove that [the companies’] use of ‘lights’ and ‘lowered tar’ descriptors in fact violated the state deceptive practices statute.”
Today’s decision came in Altria Group, Inc. v. Good.
The decision is a horrible one in that it now opens all businesses to suits that would have ordinarily been funneled to Federal Court to State Court where we all know nothing good can happen. At a time when the US is fighting to house its share of international business, increasing litigation costs is not the way to go. But, that is for another post.
Altria. It has been a wonderful investment bought back in 2000 for a now adjusted $4 a share it has produced shares of Kraft (KFT), sold, and Phillip Morris International (PM), still held. It has also produce thousands of dollars in dividends over the years. I will hold PMI as it yields 5%, has great growth prospects and little ligation risk.
But, I fear things are going to take a turn for the worse here domestically and with already owning shares of the international tobacco operations, it is time to exit. Will the upcoming purchase is UST (UST) help earnings? Yes. Will it offset the upcoming deluge of lawsuits against the company? Not so sure. Having Tom Daschle at HHS is also a bad omen. Whatever grand plans he has for universal health care will undoubtedly be funded in part on the back of cigarette companies through litigation or its customers through oppressive taxes.
The irony of the tax argument is that it is a “negative” not “progressive” tax. We know the less education a person has, the more likely they are to smoke. We also know that those with less education tend to be lower income earners. It this case, raising taxes to these addicts decreases their disposable income to fund grand ideas of health care for all. Nice…”soak the poor”
This is also a result of better opportunities for the funds. Do I think the price of Altria (MO) will double in the next 12-18 months? No. I have a high degree of confidence the price of oil will though. I am buying that through the DBO (DBO) and DXO (DXO) ETF’s.
Disclosure (“none” means no position):Long PM, DBO, DXO, none
Visit the ValuePlays Bookstore for Great Investing Books