(B)(N) PM Philip Morris International

The Tobacco Kiosk
“Warning: The Surgeon General Has Determined that Cigarette Smoking Is Dangerous to Your Health”

Drama. It’s been thirty years since Congress passed the Comprehensive Smoking Education Act of 1984 that required more specific health warnings to illuminate (or light up) the health hazards of smoking and to reinforce the earlier Public Health Cigarette Smoking Act of 1970 that was designed to limit the practice of smoking and required a stronger health warning on cigarette packages and banned cigarette advertisements on American radio and television.

The Liquor Store
“A Paradise Lost”

Liquor, beer and wine did not receive the same consideration at that time – not to mention all the other moral and social hazards that have defined us since Paradise Lost – but the cigarette manufacturers have soldiered on to world-wide acclaim and cigarettes, cigars, bullets, nails and pins are all produced with amazing industrial and agrarian efficiency, marketing prowess and effectively undiminished demand.

Courtesy: Philip Morris International

There are at least a dozen sizeable cigarette and cigar producers in the US and many of these are family or employee-owned and have histories that go back to the 19th century.

The four largest publicly-traded companies are Philip Morris, Altria, Lorillard and the Vector Group which is a holding company that includes Liggett & Myers incorporated in 1873.

Moreover, these companies have worked their way to the “top of the food chain” – vast amounts of money are collected from smokers, who get smoke, and are re-distributed to the government, bond holders and shareholders (net of production, marketing and litigation and lobbying expenses). Please see Exhibit 1 below.

Exhibit 1: Tobacco Industry Fundamentals

Tobacco Industry Fundamentals

The companies have arranged their financing so that they have only debt and no shareholders equity to speak of; the aggregate shareholders equity is minus ($5.7 billion) so that the total debt is in excess of $83 billion (happy bond holders) and they pay nearly 74% of their net earnings in shareholder dividends, $10.8 billion last year for an aggregate yield of 4.8% (happy shareholders).

On the other hand, the aggregate market value increased by only 7% last year and millions of shares change hands every day without an appreciable negative effect on the stock price.

Because of this, the “stock” has an aspect of a “currency” as a “liquid” and “safe” place to hold “money” that is likely to retain its value through a combination of dividends and stock price gains. Please see Exhibit 2 below.

Exhibit 2: The “Cigarette” Currency

The Undervalued Tobacco Companies

The chart shows that the cigarette stocks tend to trade at a premium to the “price of risk” (Risk Price (SF)) which is their “fair value” as “money” and, as usual, we make a distinction between “cash” and “money”.

To us, “money” is “invested cash” and it is, therefore, “cash at risk” and the risk is that we might not be able to get our “cash” back from the investment when we need it or the investment might not pay a return that exceeds the rate of inflation which, if we don’t get it, is just another way of losing our “cash” as “money”. Ergo, we give you the “cigarette currency” which is as good as cash and better than money.

Exhibit 3: (B)(N) The Cigarette Currency – Prices & Portfolio – January 2014

The Cigarette Currency – Prices & Portfolio – January 2014

For more information and additional references to the theory, please see our Post, The RiskWerk Company Glossary.

And for more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.