Tobacco Takes a Beating : Philip Morris Stock Hammered as Investors Fret About Liability
Investors Thursday pummeled shares of Philip Morris, raising anew a question that has plagued the tobacco industry for decades: Have fears of potential product liability finally prompted investors to end their love affair with tobacco companies?
Philip Morris lost about $4.6 billion of its market value in continued response to Wednesday’s stunning announcement that a small rival, becoming the first tobacco company to do so, has agreed to settle a tobacco liability class-action lawsuit and cooperate with proposed federal limits on advertising designed to curb smoking by minors.
The dramatic decision by Brooke Group Ltd., which owns cigarette maker Liggett Group Inc., to crack the industry’s seemingly impregnable solidarity in the face of mounting legal challenges clearly has investors edgy about the prospect that tobacco companies could be heading inexorably for their day of reckoning.
Philip Morris--Thursday’s most actively traded issue on the New York Stock Exchange, with 15.45 million shares changing hands--tumbled $5.50 to close at $92.50. That followed a loss of $4.375 on Wednesday.
U.S. Tobacco shares fell $1 to close at $33.625, and RJR Nabisco Holdings Corp. declined $1.25 to close at $32.625. American Brands, which has tobacco holdings in Britain but not the United States, rose 12.5 cents to $43.875. Brooke Group’s shares slipped 25 cents to close at $9.625.
Liggett, the smallest of the nation’s five major cigarette companies, and lawyers representing millions of smokers agreed Wednesday to drop the company
from the huge Castano class-action suit in New Orleans in return for Liggett’s funding of a national quit-smoking campaign.
So will Liggett’s decision really be the straw that breaks the Camel’s back? It depends whom you ask.
Greg Jackson, a devout Mormon and a portfolio manager for Yacktman Asset Management in Chicago, has bought about 200,000 shares of Philip Morris as the stock’s price has wallowed this week, bringing the firm’s overall holdings to about 700,000 shares.
“Morally, I think smoking’s wrong, but people don’t hire me for my religious views,” he said. Rational investors, he added, are willing to ride out the bumps because “the value is still there.”
Some market observers noted that Philip Morris is tough to resist as an investment because of its management’s excellent handling of a diversification into beer and food products.
By contrast, the Lindner Funds in St. Louis got out of tobacco stocks several years ago as the antismoking climate intensified, and weeks like this one help bolster that decision.
“We decided it really wasn’t worth the risk,” said Eric Ryback, president of the $4-billion funds. After seeing the toll that liability suits took on asbestos companies, Ryback figured that tobacco companies were possibly in for a similar downfall.
“R.J. Reynolds had been pitched to me for years and had been making a lot of money,” he said. “I just said, ‘No, thank you, I can make money elsewhere.’ ”
Then there are the so-called socially responsible investment funds that eschew cigarette company stocks on the principle that their products impose huge costs on society in terms of health or safety.
“Most social investors make decisions based on social costs to society and don’t want to profit from that,” said Steven D. Lydenberg, research director for the Boston-based Domini Social Equity index, which includes 400 publicly traded companies that are acceptable to most “socially conscious” investors.
In Lydenberg’s view, cigarette companies now come in for strong criticism on the financial as well as social front because of the looming threat of product liability suits from individuals and states, several of which have already sued tobacco companies.
Maryland’s attorney general said Thursday that the state plans to sue the tobacco industry next month, making it the seventh state trying to recover taxpayer money spent treating victims of smoking-related illnesses.
Last month, California Assemblyman Wally Knox (D-Los Angeles) proposed a bill that would force California’s big state pension funds to divest themselves of cigarette company holdings. Knox has said he views it as hypocritical that the funds invest in tobacco--to the tune of more than $560 million--while California is simultaneously paying $630 million a year to treat smoking-related illnesses among its residents.
Whatever happens, the national mood appears to be turning increasingly hostile toward the tobacco interests. Thomas A. Smith, a law professor at the University of San Diego, said the Liggett settlement reminded him of the old Winston Churchill line:
“This is not the end, or the beginning of the end, but it is the end of the beginning. . . . I don’t know how long it’s going to take, but the [cigarette companies’] equity is going to end up in the hands of smokers with diseases” rather than shareholders.
Times staff writer Tom Petruno contributed to this report.
* HIGHER INTEREST
Bennett LeBow and Carl Icahn raise their RJR Nabisco stake. D6
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Still Burning
Liggett Group’s decision to become the first tobacco company to settle a smoking-related lawsuit has changed the economics of the tobacco business--at least judging by how investors have driven the stock of Philip Morris Cos., the nation’s largest cigarette producer. A look at Philip Morris stock and the broad types of pending tobacco-related litigation:
THE BATTLEFRONTS
The five broad categories of tobacco litigation:
* Class actions: The biggest is the Castano case, in which an alliance of 60 law firms has sued the major tobacco companies on behalf of every smoker and former smoker who claims to be addicted. The case is pending before a federal court in New Orleans.
* Medicaid costs: Florida, Massachusetts, Minnesota, Mississippi and West Virginia have sued the major tobacco companies seeking compensation for the cost of treating Medicaid recipients with tobacco-related ailments. The suits are pending in each of the states.
* Secondhand smoke: Major tobacco companies have sued to challenge the Environmental Protection Agency’s classification of “environmental tobacco smoke,” commonly known as secondhand smoke, as a cause of cancer. The suit is pending in federal court in Winston-Salem, N.C.
* Advertising-promotion: Major tobacco companies and advertisers have sued to block proposed federal regulations that would restrict advertising and promotion of tobacco products. Five lawsuits are pending in federal court in Greensboro, N.C. In addition, the Supreme Court has been asked to hear an appeal by a Baltimore advertising agency against the city for restricting outdoor advertising of tobacco products.
* Individual product liability: Many smokers have sued tobacco companies over the health consequences of cigarettes. The greatest number of pending suits is in Florida, which has liberal consumer protection laws. More than 200 cases have been filed there.
Source: Associated Press
STILL MIGHTY MORRIS?
Philip Morris shares plunged $5.50 to $92.50 on Thursday, leading other tobacco stocks lower, as Wall Street again focused on the potential financial threat from smoking-related lawsuits. But Morris, the biggest tobacco company and one of the most widely held U.S. stocks, has continually recovered from such scares over the past 10 years, and has been a better investment than the average blue-chip stock.
Philip Morris stock (quarterly closes and latest)
Thursday: $92.50
Morris vs. the Market
Avg. annualized pct. return (meaning price gain plus dividends) for Philip Morris stock and S&P; 500
1986-1996
Morris: 28.9%
S&P;: 15.1%
1991-1996
Morris: 18.0%
S&P;: 17.0%
Source: Bloomberg Business News
