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Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.

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Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway. Tracy, you know,

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Speaker 1: one thing that sort of characterizes the stock market these

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Speaker 1: days is just this incredible dominance of a handful of

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Speaker 1: gigantic tech companies. I mean, you pointed out today, I

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Speaker 1: think you tweeted a chart this morning just showing how like,

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Speaker 1: if you exclude just a handful of like five companies

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Speaker 1: or whatever, the spire is basically going nowhere. Yeah, that's

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Speaker 1: exactly right. So I think it's if you exclude Facebook, Amazon, Apple, Microsoft,

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Speaker 1: and Google and just look at the remaining foes in

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Speaker 1: the spire, the index is actually down one so far

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Speaker 1: this year. And if you only look at those five

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Speaker 1: tech stocks, those are up forty or almost forty this year,

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Speaker 1: which is phenomenal. And because they're such a huge part

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Speaker 1: of the index, of course, they pull the whole thing

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Speaker 1: up to about six percent year today. What do you

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Speaker 1: think about those articles you're a journalist, what do you

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Speaker 1: think about those articles that are like, oh, if you

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Speaker 1: had invested, you say that like you're not, Oh you're

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Speaker 1: What do you think about those articles that are like, oh,

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Speaker 1: if you had invested like a hundred dollars at Apple's,

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Speaker 1: I p o, you would be like this rich by Now,

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Speaker 1: would you ever commission a story like that? I don't

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Speaker 1: think I'd commissioned them, but I can see I can

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Speaker 1: see why people keep writing them. I mean, hindsight. Hindsight

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Speaker 1: articles are often a draw, and I think I think

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Speaker 1: there are quite a few things that you could find

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Speaker 1: where you could say, oh, well, have you invested a

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Speaker 1: dollar in this, You'd now be a millionaire or even

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Speaker 1: a billionaire. And some of them are really surprising. So

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Speaker 1: I think we spoke about Domino's Pizza once. I mean,

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Speaker 1: there are stocks like that that you wouldn't necessarily expect

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Speaker 1: to outperform in that way. Right, here's a crazy stat um.

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Speaker 1: If you had invested one dollar in tobacco stocks in

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Speaker 1: your nineteen hundred, which you know no one alive today,

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Speaker 1: I don't think we could have done that. Do you

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Speaker 1: know how much it would be worth today? I do,

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Speaker 1: not one dollar? Supposedly, according to this thing I'm reading

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Speaker 1: right here, six point three million dollars if you had

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Speaker 1: invested in tobacco stocks in Oh, darn, I missed that opportunity.

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Speaker 1: But yeah, I mean tobacco stocks. Tobacco stocks kind of

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Speaker 1: fits under the Domino's Pizza model of unexpected outperformance, because

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Speaker 1: when you think about tobacco stocks, you think about all

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Speaker 1: these pressures and headwinds that have been on the business

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Speaker 1: model for for decades now, right, Yeah, mean basically since

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Speaker 1: we've been alive, or since uh you know, yeah, since

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Speaker 1: we've been alive, we've mostly known tobacco as the sort

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Speaker 1: of vilified industry. All sorts of public health efforts to

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Speaker 1: get people to stop smoking, taxes on cigarettes, to discourage consumption,

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Speaker 1: lawsuits and so forth. And yet you know, sure, you

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Speaker 1: have some noise here and there, and I think maybe

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Speaker 1: in the last couple of years they haven't done as well,

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Speaker 1: but by and large, tobacco companies cigarette companies have just

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Speaker 1: been extraordinary winners for years and years and years, even

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Speaker 1: with all of these sort of efforts to slow them down. Yeah,

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Speaker 1: so I think this is a really interesting industry to

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Speaker 1: focus on at the moment um. Even though we're talking

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Speaker 1: about things that happened to tobacco over the past one

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Speaker 1: hundred years or so, you can see there's there's definitely

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Speaker 1: parallels between tech and makers. I guess because government policy

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Speaker 1: played such a role in the tobacco industry, and we're

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Speaker 1: starting to see I think the beginnings of government policy

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Speaker 1: really come into play for the big tech companies as well.

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Speaker 1: And I think people even called like I've seen people

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Speaker 1: say things like, oh, Facebook is the new tobacco or whatever.

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Speaker 1: They usually mean that negatively, but if you took it

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Speaker 1: literally from an investment standpoint, that's like, oh, that I

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Speaker 1: should definitely find. Yeah, there's definitely tension there between um,

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Speaker 1: it being a complete moneymaker and also people saying it's

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Speaker 1: a negative for society. Right, So, anyway, today we're going

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Speaker 1: to talk about tobacco stocks in general and why they've

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Speaker 1: done so well, and not just tobacco stocks, but tobacco companies,

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Speaker 1: and what it is sort of unique about this industry

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Speaker 1: that for decade after decade after decade, year after year,

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Speaker 1: and despite all these head winds, they've just been extraordinary

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Speaker 1: money Maker's very hard to disrupt them bring them down

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Speaker 1: in any way. We're going to be talking with two

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Speaker 1: guests today. Gene Hoots. He's an investment advisor and he's

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Speaker 1: the author of a book, Going Down Tobacco Road. R. J.

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Speaker 1: Reynolds Tobacco Empire, The gold Leaf in North Carolina. And

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Speaker 1: Lawrence Hampton he's also an investment advisor and UH follow

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Speaker 1: him on Twitter. He's talked a lot over the years

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Speaker 1: about tobacco stocks and about what makes them unique. And

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Speaker 1: Gene and Lawrence. Uh they did a Q and A

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Speaker 1: on there on Lawrence's blog a few weeks ago about

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Speaker 1: the industry and I thought it was super interesting and

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Speaker 1: I thought we should expand on it here. So very

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Speaker 1: excited to learn more about these about tobacco companies with

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Speaker 1: these two. Uh, So let me bring them in one

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Speaker 1: at a time. Lawrence, thank you very much for joining us. Hey,

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Speaker 1: thanks guys, Thanks appreciate the opportunity. And U Gene, I

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Speaker 1: really appreciate you coming here as well and talk about

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Speaker 1: your book. Thank you. It's a pleasure to be here.

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Speaker 1: I guess one of you will be talking about your

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Speaker 1: literal book and one of you will be talking your

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Speaker 1: book so to speak. But no, seriously, you know, let's

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Speaker 1: kick it off. I mean, Lawrence, I followed you for

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Speaker 1: a long time. I know you sort of regularly point

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Speaker 1: out what an extraordinary industry this has been from a

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Speaker 1: sort of investment standpoint. When did you sort of start

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Speaker 1: paying attention to tobacco stocks is sort of like their

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Speaker 1: own almost their own asset class. What got you interested

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Speaker 1: in them? I think when I started in the industry

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Speaker 1: in two thousand two and started to manage other people's

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Speaker 1: money and two thousand five and uh, sort of a

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Speaker 1: contrarian by nature, and I was heavily influenced by people

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Speaker 1: like David Dreaman and Peter Lynch and and both of

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Speaker 1: those guys talked at length about tobacco stocks and what

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Speaker 1: was seemingly they're perpetually cheap valuations at that point in

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Speaker 1: time and the early two thousand's that was really sort

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Speaker 1: of a contrarian play. They were just coming out of

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Speaker 1: the Master Settlement Agreement, the lawsuits, things like that. Valuations

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Speaker 1: were depressed div it in you olds were in the

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Speaker 1: double digits, and you they really were facing kind of

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Speaker 1: a bankruptcy threat at that point in time. And and

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Speaker 1: so if you really looked at the businesses, you could

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Speaker 1: see they were still making money despite all the negative headlines.

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Speaker 1: And if you dig a little a little deeper, you

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Speaker 1: understand the dynamics of the industry. Or almost unlike any

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Speaker 1: other if you look at Ken French's website, he has

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Speaker 1: industry data going back to the twenties, and as far

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Speaker 1: as I can tell, there's never been a negative ten

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Speaker 1: year period in total return for the tobacco industry. That's

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Speaker 1: unlike just about any other you talk with with Tracy

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Speaker 1: about this hypothetical time machine of going back and investing money,

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Speaker 1: Um and some big winner, and if you look at it, Microsoft,

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Speaker 1: all these big tech companies. I think at some point Apple,

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Speaker 1: they suffered through uh fairly long periods in the wilderness,

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Speaker 1: so to speak. But tobacco for the most part, really hasn't.

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Speaker 1: I mean, if you had invested that money at any

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Speaker 1: point in time over the past one years, you probably

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Speaker 1: would have had a decent outcome over the subsequent decade.

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Speaker 1: So it's really been a fascinating industry. And I followed

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Speaker 1: it for a long time. I think our clients have

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Speaker 1: been invested in it for fifteen and sixteen year or

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Speaker 1: something like that. So Lawrence has been following the industry

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Speaker 1: and Gene you were actually in the tobacco industry, and

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Speaker 1: of course you've written this book about your experience. Can

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Speaker 1: can you maybe in a nutshell tell us Um what

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Speaker 1: exactly you were doing at tobacco firms and do you

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Speaker 1: agree with Lawrence that the business is uh special in

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Speaker 1: many ways. First of all, I certainly agree with that

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Speaker 1: it it has been a special industry, and thinking about

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Speaker 1: that industry is what prompted me to write the book.

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Speaker 1: I grew up in tobacco country. I'm a native North

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Speaker 1: Carolinian and didn't realize how much tobacco had always been

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Speaker 1: a part of my life until I started this book.

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Speaker 1: But I worked twenty year twenty one years for R. J.

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Speaker 1: Reynolds in Western Salem. I was in the financial area

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Speaker 1: one way or another, mergers and acquisitions for a while,

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Speaker 1: and in the last ten years I ran the pension

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Speaker 1: and profit sharing and four oh one K plans worldwide

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Speaker 1: managing those moneys. So I was of the tobacco industry,

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Speaker 1: but not in it. I looked at the company as

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Speaker 1: more or less an analyst would from outside so often

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Speaker 1: and dealt with the tobacco analysts and talked with them

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Speaker 1: about it. So that gave me a little different perspective

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Speaker 1: than most people in the company. And after thirty years

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Speaker 1: I decided to sit down and write this book. The

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Speaker 1: key event in the life of R. J. Reynolds and

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Speaker 1: and Winston Salem as well, the home of off J.

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Speaker 1: Reynolds was the leveraged buy out by k k R

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Speaker 1: in early eighty nine. That was a seminal event in

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Speaker 1: the life of the company, and I built my story

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Speaker 1: around that. Why did that happen? Why I was there

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Speaker 1: buy out, what led up to it, and then what

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Speaker 1: followed it? And I was interested to see, just as

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Speaker 1: Lawrence has already mentioned, through all of those good times

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Speaker 1: and bad of corporate raiders, mistakes and acquisitions that Reynolds

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Speaker 1: made that were misdirected, perhaps the tobacco industry just rode

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Speaker 1: right along, generating a return on equity of somewhere between

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Speaker 1: picking number fourteen and a half the nineteen percent year

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Speaker 1: after year after year. There's a lot to dig into,

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Speaker 1: and the question, of course, is why has the industry

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Speaker 1: been able to um, you know, continue to create this

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Speaker 1: return on equity for so long. We'll get to these

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Speaker 1: sort of legal headwinds and the other attempts to slow

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Speaker 1: down the industry that public health officials have undertaken over

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Speaker 1: the years, but you know, it just sort of that aside.

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Speaker 1: You're like, look at a the are we of the industry,

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Speaker 1: and you're like, well, okay, why didn't have an more

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Speaker 1: competitors come in and squeezed those results. How why haven't

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Speaker 1: margins come down? Why hasn't there been a price war?

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Speaker 1: Let's start with that question. Either one of you could

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Speaker 1: take it or both of you. Why hasn't this extraordinary

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Speaker 1: outperformance resulted in more competition in the therefore poorer performance.

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Speaker 1: One simple explanation is the performance has been great, but

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Speaker 1: the industry has been losing customers all along. And uh,

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Speaker 1: you know Peter Lynch and one of his books talks

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Speaker 1: about the comparison between Philip Morris and Xerox, and Xerox

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Speaker 1: was kind of the sexy growth stock and the sixties,

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Speaker 1: and that was kind of the point at which smoking

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Speaker 1: started to fall out of favor, when the health health

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Speaker 1: risks became well known, and so Xerox ended up attracting

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Speaker 1: a lot of competitors. And Uh, on the other hand,

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Speaker 1: tobacco which started to lose clients. I think smoking is

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Speaker 1: down and percentage terms over the last fifty years. Why

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Speaker 1: would you want to get into that industry? It's it's

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Speaker 1: a declining industry of multi ice cube, so to speak.

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Speaker 1: So uh, like Peter LYNCEI, a shrinking industry doesn't attract

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Speaker 1: much competition, it's better to be sort of the dominant

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Speaker 1: player and a slow growth or no growth industry and

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Speaker 1: customer terms. Looking back a long term, I think there's

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Speaker 1: a number of things that brought the tobacco industry to

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Speaker 1: a few key players today. It took a long time

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Speaker 1: to get there, and the industry doesn't want to talk

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Speaker 1: about it. But I truly believe the basic thing that

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Speaker 1: brought all this, uh largest of the tobacco companies was

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Speaker 1: the tobacco companies are setting an addictive product. It's fairly inexpensive,

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Speaker 1: or has been relatively so throughout history. There's just a

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Speaker 1: great interest and desire to have nicotine in one form

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Speaker 1: or another. So they had a product, it was marketable.

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Speaker 1: It really developed customers that were addicted to it over time,

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Speaker 1: and the industry did not want to face that for

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Speaker 1: a long time. I've talked to executives today and some

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Speaker 1: of them said, we wished we'd have faced up to

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Speaker 1: it and avoided the controversy years before we did. We

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Speaker 1: still could have been in the business. So that's the

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Speaker 1: first thing. I think that was an advantage that most

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Speaker 1: businesses do not have. I would imagine that people are

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Speaker 1: not addicted to Facebook, to the point that they couldn't

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Speaker 1: find a competitive product to go to or a different

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Speaker 1: website if they needed to. The tobacco industry, part of

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Speaker 1: that was chance with the product. They had. Policies along

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Speaker 1: the way over decades led to the fact that there

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Speaker 1: were only a few people participating in the business. As

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Speaker 1: Lawrence said, there's not a real interest in joining it

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Speaker 1: now but government policies. But one of the major ones

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Speaker 1: was when the advertising of tobacco was outlawed, first on

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Speaker 1: television then from billboards. That made it all most impossible

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Speaker 1: for new entrants to come in. No matter how profitable

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Speaker 1: the business was, you just couldn't afford to build a

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Speaker 1: cigarette plant, and there was no way to mount a

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Speaker 1: marketing and distribution campaign for a new cigarette. A new

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Speaker 1: cigarette would have been quite profitable for anybody who could

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Speaker 1: do it, but it just wasn't worth the risk. Smokers

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Speaker 1: are very, very loyal to the brand, and it's very

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Speaker 1: hard to get him to change. Could I give you

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Speaker 1: one brief anecdotal example of that. Yeah, I just I

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Speaker 1: just had this conversation the other day with a young

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Speaker 1: man I'd never met him, and his his grandfather was

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Speaker 1: a major executive with R. J. Reynolds, and he said

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Speaker 1: that his his grandmother, who ultimately died of lung cancer,

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Speaker 1: was a devoted camel smoker, and when she found that

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Speaker 1: Reynolds was going to make a filtered product, she declared

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Speaker 1: that a filter would never touch her lips, and she

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Speaker 1: went out and bought all. They didn't. They did not

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Speaker 1: discontinue the manufactur of camels sixty millimeter regulars, but she

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Speaker 1: thought they might. She went out and bought as many

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Speaker 1: camels as she could build her freezer with them so

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Speaker 1: that she would have a lifetime supply because she didn't

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Speaker 1: want to switch brand. That's how there's ore their product.

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Speaker 1: The Marlborough Cowboy people just as loyal Tomorrow Burrows believe me,

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Speaker 1: all right. So you have an addictive products where brand

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Speaker 1: loyalty really matters. But advertising is also what is important.

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Speaker 1: Because of the brand loyalty aspect, you need to build

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Speaker 1: up that following. Once you have it, you're basically guaranteed

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Speaker 1: guaranteed to keep those customers. Could you maybe described in

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Speaker 1: a bit more detail how the industry whittled down to

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Speaker 1: just a handful of major players, because I imagine in

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Speaker 1: the nineteen hundreds when you could have invested that one

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Speaker 1: dollar in a tobacco for it wouldn't happen. Clear which

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Speaker 1: tobacco firm you should invest in, there probably be quite

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Speaker 1: a few around, right. What was the industry like, back like,

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Speaker 1: back then, and how did it evolve exactly to the

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Speaker 1: point where we have two or three major players. Well,

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Speaker 1: let's look at nineteen hundred or thereabouts, there were hundreds

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Speaker 1: of chewing tobacco products. There were very few cigarettes sold

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Speaker 1: at the turn of the last century. Cigarettes did not

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Speaker 1: become nationally popular until about the time of World War One.

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Speaker 1: People had chewing tobacco, they had snuff, smokeless tobaccos, and

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Speaker 1: pipe tobaccos. But the thing that changed things was primarily

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Speaker 1: around the turn of the century, James buck Duke created

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Speaker 1: the American Tobacco Trust, and that was the consolidation of

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Speaker 1: the industry. So that alone consolidated most of the tobacco

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Speaker 1: companies and to three or four major comps. You had

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Speaker 1: American Tobacco, you had Ligot, Meers, R. J. Reynolds, and

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Speaker 1: that was about it. Philip Morris had a piddling market

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Speaker 1: share at that point. So the breakup of the Tobacco

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Speaker 1: Trust and by by Teddy Roosevelt's anti trust measures created

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Speaker 1: four or five major players in in in that era.

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Speaker 1: That was partly a result of government policy that created

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Speaker 1: just that group. And then the tobacco industry really took

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Speaker 1: off in nineteen thirteen, and that that is the cigarette

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Speaker 1: part of it. Again, there was no there were no

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Speaker 1: real national brands. R. J. Reynolds introduced the first national brand, Campbell,

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Speaker 1: in nineteen He was a he was a genius at

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Speaker 1: advertising and promotion, and he had a good product, so

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Speaker 1: he brought that out. The too. Other tobacco companies, Ligot

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Speaker 1: Meers and American realized they had to have a competitive product,

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Speaker 1: so they brought out Chesterfield and Lucky Strike. Those three

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Speaker 1: dominated the market. Then what really propelled the market forward

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Speaker 1: was World War One. The dough Boys went overseas h

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Speaker 1: Perishing declared that they needed cigarettes in order to win

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Speaker 1: the war, and so we developed through gift of cigarettes

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Speaker 1: to the World War One boys overseas, we developed a

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Speaker 1: national market. When they came home, we had a whole

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Speaker 1: generation of people who now smoked cigarettes and were loyal

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Speaker 1: to those three brands. And that was the beginning. This

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Speaker 1: was repeated in World War Two all over again. And

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Speaker 1: so you've built a market that way, and that's that's

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Speaker 1: how you by chances as well as designed. You were

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Speaker 1: limited to three or four or five major players. Philip

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Speaker 1: Morris was a special case. They they were people who

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Speaker 1: came later with a stroke of genius with the mar

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Speaker 1: Borre a cowboy. I think that was partly genius and

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Speaker 1: partly luck. They were there at the right time, and

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Speaker 1: they they undoubtedly used that opportunity to build their market

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Speaker 1: share and grow like crazy, and they were uh well

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Speaker 1: rewarded for it. The stockholders were. It's it's been the

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Speaker 1: premier cigarette company ever since the about about nine when

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Speaker 1: they took off. So um, you know, it's interesting you

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Speaker 1: mentioned the you know, how many different ways people consumed

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Speaker 1: tobacco a hundred years ago, and cigarettes were in this

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Speaker 1: big Obviously, these days there are a plethora of other

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Speaker 1: alternatives and so we don't really see new cigarette startups

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Speaker 1: per se, but we have seen a lot of companies

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Speaker 1: come into other delivery mechanisms, most notably vaping. Jewel was

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Speaker 1: extremely big, although I think they've run into some trouble

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Speaker 1: in recent years. We also see states taking a more

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Speaker 1: liberal attitude towards consuming cannabis, pretty much all over the country.

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Speaker 1: How do these uh factor into thinking about the competitive risks?

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Speaker 1: Is this a new phase where they're actually are sort

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Speaker 1: of new entrant that could theoretically compete for you know,

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Speaker 1: mouth share. I guess I don't know what term you

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Speaker 1: use in a way that we haven't really seen before.

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Speaker 1: I would just say I think there's that possibility. But

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Speaker 1: the the threat to those things that always seems to

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Speaker 1: be hanging over them is is FDA regulation UM jewels

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Speaker 1: having to go through that process now to get approved UM.

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Speaker 1: I think Philip Morris International with i q os is

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Speaker 1: the only device that has uh FDA approval for marketing

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Speaker 1: their their product as is kind of a safer alternative,

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Speaker 1: if I'm not mistaken. It's still a very difficult market

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Speaker 1: to to break into in a big way. There certainly

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Speaker 1: are a lot of new methods. A Swedish match has

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Speaker 1: a new nicotine product that's a kind of an oral

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Speaker 1: product that that is kind of another competitor to chewing

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Speaker 1: tobacco and smoking and so forth. There there are a

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Speaker 1: few things that are coming in, but almost with the

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Speaker 1: brand loyalty, people still have their their preferences, and I

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Speaker 1: think there are also some cultural differences. What appeals to

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Speaker 1: smokers in Japan as an alternative, for example, may not

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Speaker 1: necessarily appeal to Americans. So it remains to be seen

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Speaker 1: just how popular vaping gets to be. It It certainly

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Speaker 1: does present a little bit of competition, but on the

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Speaker 1: other hand, a lot of these companies have their own

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Speaker 1: vaping products, so it just seems to me the most

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Speaker 1: likely outcome is is that they will continue to dominate

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Speaker 1: the nicotine space for lack of a better term, whether

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Speaker 1: it's through combustibles, uh oral or or vaping in some

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Speaker 1: fashion or another, simply because it's it's just very difficult

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Speaker 1: to get your product there, get it approved. You've seen

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Speaker 1: different states take different laws against vaping, but of course

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Speaker 1: they are the most part still allow combustibles but tax

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Speaker 1: them heavily. I just think it's going to be a

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Speaker 1: very tough nut to crack for a lot of these

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Speaker 1: alternative delivery mechanisms to take a a very big share

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Speaker 1: of the nicotine market. I'm curious we talked about how

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Speaker 1: tobacco stocks would have been a really good bye a

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Speaker 1: hundred years ago. Would either of you recommend them as

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Speaker 1: an investment now? And I'm going to add a disclaimer

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Speaker 1: here that you know, no one on all thoughts is

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Speaker 1: officially recommending any stock spot. I'm curious would you say

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Speaker 1: they are a good investment given some of the headwinds

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Speaker 1: in competition that you just described. Well, I will just

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Speaker 1: say that in full disclosure, both personally and client portfolios,

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Speaker 1: we we do have positions and the major tobacco names,

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Speaker 1: so obviously we we do think that they have rewarding

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Speaker 1: or potential going forward. The last few years have definitely

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Speaker 1: been been tough, although I would argue almost all of

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Speaker 1: that share price under performance has been multiple contraction. You've

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Speaker 1: seen Altriaz, which is the domestic Philip Morris, You've seen

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Speaker 1: their multiple go from the low twenties to the high

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Speaker 1: single digits, although they've continued to raise their dividend year

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Speaker 1: after year and increase their earnings. Uh. In my mind,

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Speaker 1: that's just uh, And that really stem from I think

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Speaker 1: in two thousand seventeen when the f d A sort

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Speaker 1: of threatened to limit the amount of nicotine and and cigarettes,

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Speaker 1: and so far really nothing has happened in that space,

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Speaker 1: but it's certainly sort of returned to investors minds the

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Speaker 1: idea of heightened regulation, which really hadn't been there in

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Speaker 1: a while. Certainly, I think that even though it is

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Speaker 1: a shrinking industry, the potential for the overall nicotine market

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Speaker 1: is still relatively large. And I do think there will

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Speaker 1: be some things that will happen going forward. But but yes,

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Speaker 1: I do think that that they will eventually return to favor.

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Speaker 1: But you know, as you pointed out earlier, everybody is

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Speaker 1: kind of on the tech side of things. Some of

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Speaker 1: these other industries are are out of favor, but that

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Speaker 1: tends to happen in cycles, and I do think they'll eventually,

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Speaker 1: um come back in favor. I took my analysts head

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Speaker 1: off years ago, so I'm not about to try to

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Speaker 1: uh add anything to to what Lawrence has said on that.

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Speaker 1: But let me give you a little historical perspective on

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Speaker 1: the so called nicotine delivery system. That was a term

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Speaker 1: that was coined by a dear friend of mine, Dr

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Speaker 1: Claude Tigue, who was in research at r j R.

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Speaker 1: He wrote an internal memo about that that was strictly

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Speaker 1: an academic or research product. It it made it to

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Speaker 1: the to a congressional investigation and became a buzzword from

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Speaker 1: that point on. But there has been a desire for

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Speaker 1: a nicotine delivery system since about the late fifteen hundreds,

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Speaker 1: and it got it picked up steam in England and

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Speaker 1: all over Europe when Sir Walter Raleigh introduced it throughout Europe.

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Speaker 1: There's been a love hate relationship between governments and nicotine

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Speaker 1: ever since. Uh. It's interesting that the first anti smoking

408
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Speaker 1: campaign was waged by Czar Alexis in Russia in the

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Speaker 1: mid sixteen hundreds. He had fairly severe finds. The first

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Speaker 1: defense for smoking was a slit nose and transferred to Siberia.

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Speaker 1: The second time they caught you smoking it was the

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Speaker 1: death penalty. He still wasn't able to stamp out the

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Speaker 1: tobacco urge the people had. And what what governments and

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Speaker 1: kings and queens and czars learned after that was, look,

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Speaker 1: we can make a lot better deal here by taxing

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Speaker 1: this product and we can't trying to stop it. And

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Speaker 1: that's been going on ever since, bringing that all the

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Speaker 1: way through to the Master Settlement Agreement. I was aware

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Speaker 1: of the agreement. I knew something about it, but I

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Speaker 1: was dumbfounded when I looked at the numbers. When you

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Speaker 1: go through the settlement agreement that was made, there were

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Speaker 1: a number of stakeholders that now become vested interest holders

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Speaker 1: in the continuation of the cigarette business. And you have

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Speaker 1: federal excise taxes, state exercise taxes, payments to the f

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Speaker 1: d A, payments to the farmers, payments of billions of

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Speaker 1: dollars to the lawyers who brought those class action suits.

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Speaker 1: When you add it all up, and from from the

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Speaker 1: time that it started about nineteen, I guess that was

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Speaker 1: what eighty nine I think ninety nine whichever, fifty projecting

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Speaker 1: those numbers fifteen fifty years forward, the tobacco industry was

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Speaker 1: on the hook for one seven trillion dollars of payments

432
00:27:35,600 --> 00:27:39,080
Speaker 1: over that period of time. How did they address this?

433
00:27:39,560 --> 00:27:41,720
Speaker 1: If you looked at that outside and looked at that

434
00:27:41,760 --> 00:27:45,359
Speaker 1: astounding number and say, my heavens, this is gonna break

435
00:27:45,400 --> 00:27:48,560
Speaker 1: the industry, you know what they did. They said, we

436
00:27:48,600 --> 00:27:51,600
Speaker 1: can cover this, will raise cigarettes forty five cents a pack.

437
00:27:52,080 --> 00:27:55,479
Speaker 1: That covered their bills to all these outside people and

438
00:27:55,520 --> 00:27:59,000
Speaker 1: gave a little increased profit margin Beside that's the nature

439
00:27:59,000 --> 00:28:01,720
Speaker 1: of the business talk. I'm fascinating by that because you know,

440
00:28:01,760 --> 00:28:05,160
Speaker 1: I mentioned, like my whole life, I've been uh feeling

441
00:28:05,359 --> 00:28:09,080
Speaker 1: the public health and lawyers and everyone going after this industry.

442
00:28:09,560 --> 00:28:13,560
Speaker 1: So I'm the master settlement agreement was in the late nineties.

443
00:28:13,960 --> 00:28:17,159
Speaker 1: Talk a little bit more about how that came about,

444
00:28:17,240 --> 00:28:19,880
Speaker 1: and then that point you made about the stakeholders, how

445
00:28:19,880 --> 00:28:23,000
Speaker 1: suddenly there are a lot of interested parties, not just

446
00:28:23,119 --> 00:28:27,879
Speaker 1: tobacco company shareholders, who want to see this industry continue.

447
00:28:28,200 --> 00:28:31,720
Speaker 1: Talk about sort of how that, how that all came about. Well,

448
00:28:31,760 --> 00:28:36,959
Speaker 1: it came about primarily through the the instigator and the

449
00:28:37,040 --> 00:28:39,760
Speaker 1: leader in it. To give them credit from there for

450
00:28:39,840 --> 00:28:43,840
Speaker 1: their creativity, was a group of lawyers down in Mississippi.

451
00:28:44,200 --> 00:28:49,720
Speaker 1: They had successfully sued the asbestos manufactors and gotten something

452
00:28:49,760 --> 00:28:53,000
Speaker 1: of a war test together, and that gave him an

453
00:28:53,000 --> 00:28:56,240
Speaker 1: opportunity to go after other industries. And the tobacco industry

454
00:28:56,320 --> 00:29:00,880
Speaker 1: was ripe for this. So they approached the states attorneys

455
00:29:00,880 --> 00:29:03,480
Speaker 1: general of all of the states. And I'll simplify it

456
00:29:03,520 --> 00:29:06,760
Speaker 1: because there were a feudal side deals here, But basically

457
00:29:07,040 --> 00:29:11,840
Speaker 1: they went through this this suit and had a class

458
00:29:11,840 --> 00:29:15,840
Speaker 1: action representing all the attorneys general, and it fell apart

459
00:29:15,880 --> 00:29:19,920
Speaker 1: in Congress. They then came back and finally got together

460
00:29:19,960 --> 00:29:24,200
Speaker 1: with the tobacco companies and made this agreement. That's how

461
00:29:24,360 --> 00:29:27,360
Speaker 1: That's how it happened. There was a really interesting part

462
00:29:27,440 --> 00:29:31,640
Speaker 1: of the settlement that I that I had not realized before.

463
00:29:32,320 --> 00:29:35,720
Speaker 1: In all of the machinations within r j R. After

464
00:29:35,760 --> 00:29:40,160
Speaker 1: the buyouts, CEOs change, a number of people came in

465
00:29:40,240 --> 00:29:43,160
Speaker 1: and tried their hand at Ringing Tobacca Company and weren't successful.

466
00:29:43,760 --> 00:29:47,120
Speaker 1: Of all the unlikely people that they brought in as

467
00:29:47,160 --> 00:29:51,280
Speaker 1: the CEO was Steve Goldston, who was who was an

468
00:29:51,280 --> 00:29:55,560
Speaker 1: attorney with r j R's outside council, Davis polk Wardwell,

469
00:29:56,760 --> 00:30:00,080
Speaker 1: he came in as the CEO. He knew nothing. I

470
00:30:00,120 --> 00:30:02,520
Speaker 1: can't say he knew nothing about the tobacco industry, but

471
00:30:02,560 --> 00:30:06,760
Speaker 1: he had never worked in the tobacco industry. Gohold Stone,

472
00:30:07,240 --> 00:30:09,080
Speaker 1: in my book, turned out to be one of the

473
00:30:09,160 --> 00:30:12,960
Speaker 1: few really great heroes within a story that had a

474
00:30:13,000 --> 00:30:19,080
Speaker 1: mixed message from from success. And he recognized finally as

475
00:30:19,120 --> 00:30:22,520
Speaker 1: probably only an attorney could this ship is sail of

476
00:30:22,600 --> 00:30:27,040
Speaker 1: trying to stone Wall and say there's no connection between

477
00:30:27,160 --> 00:30:29,880
Speaker 1: cigarettes and cancer. He took that. He went to the

478
00:30:29,920 --> 00:30:33,040
Speaker 1: other majors and said, look, if we contend, if you

479
00:30:33,160 --> 00:30:36,520
Speaker 1: continue this approach, the government is going to run us

480
00:30:36,560 --> 00:30:39,360
Speaker 1: out of business. We've got to come to terms here

481
00:30:39,440 --> 00:30:42,440
Speaker 1: and that's what led to the Master Settlement agreement, was

482
00:30:43,080 --> 00:30:47,120
Speaker 1: him bringing the industry to the table and some rationality

483
00:30:47,160 --> 00:30:50,800
Speaker 1: I think, and willingness to compromise. They recognized they were

484
00:30:50,800 --> 00:31:09,160
Speaker 1: going to have to do something along those lines. So

485
00:31:09,360 --> 00:31:12,320
Speaker 1: we're talking about the public health concern and the government response,

486
00:31:12,360 --> 00:31:17,680
Speaker 1: which obviously limited the creation of new customers. I'm curious

487
00:31:17,720 --> 00:31:22,800
Speaker 1: in recent years we've seen another trend I guess or awareness,

488
00:31:22,920 --> 00:31:27,520
Speaker 1: which is the the E s G movement in capital markets,

489
00:31:27,600 --> 00:31:30,560
Speaker 1: so the idea that people should be investing in sustainable

490
00:31:30,920 --> 00:31:33,880
Speaker 1: debt and equity. Do either of you feel that E

491
00:31:34,040 --> 00:31:37,600
Speaker 1: s G has yet had an impact on the tobacco

492
00:31:37,720 --> 00:31:42,400
Speaker 1: industry or is maybe limiting capital or affecting the cost

493
00:31:42,440 --> 00:31:46,440
Speaker 1: of capital in some way. I'll just offer my my

494
00:31:46,520 --> 00:31:50,360
Speaker 1: thoughts on that. It's it's very hard to to quantify

495
00:31:50,760 --> 00:31:53,000
Speaker 1: in any way. I mean, you can always look at

496
00:31:53,000 --> 00:31:58,600
Speaker 1: the the share price and whether some major institutions are

497
00:31:58,680 --> 00:32:03,640
Speaker 1: forced to uh divest their their shares. Of course, somebody

498
00:32:03,680 --> 00:32:06,520
Speaker 1: has to buy those shares them for the market to clear,

499
00:32:06,720 --> 00:32:10,040
Speaker 1: so somebody will end up owning them. The trouble is

500
00:32:10,080 --> 00:32:14,800
Speaker 1: that at what price, And it's it's very hard to

501
00:32:14,840 --> 00:32:18,760
Speaker 1: say that that movement has has raised their cost of

502
00:32:18,880 --> 00:32:25,160
Speaker 1: capital in any material way. For example, Altria pays out

503
00:32:25,240 --> 00:32:29,400
Speaker 1: something like of its profits every year, so I'm not

504
00:32:29,440 --> 00:32:32,680
Speaker 1: sure they need anybody's capital because they're too busy returning

505
00:32:32,800 --> 00:32:37,360
Speaker 1: cash to their shareholders. And the same thing for I

506
00:32:37,400 --> 00:32:40,360
Speaker 1: think be a T and and most of the other

507
00:32:40,440 --> 00:32:44,960
Speaker 1: players the on the fixed income side, which is maybe

508
00:32:45,040 --> 00:32:48,240
Speaker 1: the they have access the debt market in recent years,

509
00:32:49,000 --> 00:32:52,360
Speaker 1: there's really no evidence that their interest rates or any

510
00:32:52,440 --> 00:32:57,840
Speaker 1: higher than anybody else's of a similar balance sheet quality.

511
00:32:57,960 --> 00:33:00,800
Speaker 1: So to me, it's it's a little bit tricky to

512
00:33:00,880 --> 00:33:03,560
Speaker 1: try to say that that E s G is is

513
00:33:03,600 --> 00:33:07,520
Speaker 1: really pressuring them in a financial way. Certainly they're aware

514
00:33:07,560 --> 00:33:11,680
Speaker 1: of it. If you read through their commentaries, they are

515
00:33:11,800 --> 00:33:16,480
Speaker 1: are trying to um get ahead of this movement and

516
00:33:16,520 --> 00:33:20,120
Speaker 1: sort of market themselves. Philip Morris International talks about a

517
00:33:20,200 --> 00:33:24,000
Speaker 1: smoke free future and what they're doing to to try

518
00:33:24,000 --> 00:33:30,240
Speaker 1: to get their customers to pivot from combustibles too heat

519
00:33:30,320 --> 00:33:33,560
Speaker 1: not burn and lower risk products. And so in a way,

520
00:33:34,320 --> 00:33:37,080
Speaker 1: there's that sort of funny how they're appealing to the

521
00:33:37,080 --> 00:33:40,800
Speaker 1: E s G crowd by saying that there they're actually

522
00:33:40,840 --> 00:33:43,880
Speaker 1: trying to to do what's best for their customers by

523
00:33:43,880 --> 00:33:47,840
Speaker 1: getting them to pivot to these other products. So I

524
00:33:47,880 --> 00:33:50,200
Speaker 1: think they're aware of it. Whether or not E s

525
00:33:50,240 --> 00:33:53,120
Speaker 1: G actually matters to their bottom line, I don't know.

526
00:33:53,840 --> 00:33:56,280
Speaker 1: It probably matters more in terms of who ends up

527
00:33:56,280 --> 00:34:01,800
Speaker 1: owning the shares, but that's about all I can make

528
00:34:01,840 --> 00:34:04,080
Speaker 1: of it from what I've seen over the last few

529
00:34:04,160 --> 00:34:08,080
Speaker 1: years of this movement sort of becoming sort of niche

530
00:34:08,080 --> 00:34:11,000
Speaker 1: to more mainstream. Let me ask a sort of follow

531
00:34:11,040 --> 00:34:15,160
Speaker 1: up question to Laurence um He s G aside. I'm

532
00:34:15,160 --> 00:34:17,600
Speaker 1: just curious about the sort of conversations you might have

533
00:34:17,680 --> 00:34:21,759
Speaker 1: with clients. They're probably people who uh, just feel uncomfortable

534
00:34:21,800 --> 00:34:26,399
Speaker 1: investigate tobacco stocks, worried about owning a part of an

535
00:34:26,400 --> 00:34:29,120
Speaker 1: industry that does lead to all sorts of adverse health

536
00:34:29,120 --> 00:34:32,600
Speaker 1: effects and so forth. What are those conversations like as

537
00:34:32,640 --> 00:34:35,799
Speaker 1: a financial advisor dealing with that aspect of it. Sure,

538
00:34:35,920 --> 00:34:40,880
Speaker 1: so we we give our clients the ability to identify

539
00:34:41,080 --> 00:34:43,960
Speaker 1: what they want to own a course and also what

540
00:34:44,080 --> 00:34:46,880
Speaker 1: they don't want to own, And more than a few

541
00:34:47,200 --> 00:34:51,720
Speaker 1: say that they would prefer not to own tobacco directly,

542
00:34:51,800 --> 00:34:54,600
Speaker 1: and that's fine. We can work around that. The vast

543
00:34:54,680 --> 00:34:59,359
Speaker 1: majority simply look at it from a more pragmatic standpoint,

544
00:34:59,440 --> 00:35:01,960
Speaker 1: which is, where do you draw the line? So, are

545
00:35:01,960 --> 00:35:05,719
Speaker 1: you going to own shares of Walmart or some sort

546
00:35:05,760 --> 00:35:08,759
Speaker 1: of retailer that that sells these products? Are you going

547
00:35:08,880 --> 00:35:12,360
Speaker 1: to look at it in a in a different standpoint

548
00:35:12,440 --> 00:35:16,640
Speaker 1: that what's acceptable if you own an index fund, they

549
00:35:16,680 --> 00:35:21,680
Speaker 1: own these shares. So really there's what are you doing

550
00:35:21,719 --> 00:35:25,279
Speaker 1: other than making yourself sort of feel a little bit

551
00:35:25,520 --> 00:35:28,080
Speaker 1: uh and I wouldn't say more really superior, but making

552
00:35:28,080 --> 00:35:30,400
Speaker 1: yourself feel a little more comfortable and how you're invested

553
00:35:31,360 --> 00:35:33,879
Speaker 1: just by not owning no shares directly. And I think

554
00:35:33,880 --> 00:35:39,759
Speaker 1: most people recognize that they just want to invest in

555
00:35:39,760 --> 00:35:41,960
Speaker 1: a way that that makes the money gives them an

556
00:35:41,960 --> 00:35:46,120
Speaker 1: opportunity to achieve the returns that they need for their retirement.

557
00:35:46,640 --> 00:35:50,720
Speaker 1: And so they end up sort of concluding that, uh,

558
00:35:50,760 --> 00:35:53,840
Speaker 1: they're okay with with owning a small stake in a business,

559
00:35:53,920 --> 00:35:57,480
Speaker 1: and they're not as on a secondary market. They're not

560
00:35:57,560 --> 00:36:02,160
Speaker 1: giving the money directly to the company, simply receiving their

561
00:36:02,200 --> 00:36:04,759
Speaker 1: share of the profits via dividends or what have you,

562
00:36:04,880 --> 00:36:07,040
Speaker 1: and they're free to take that money and do with

563
00:36:07,120 --> 00:36:10,840
Speaker 1: it what they want, whether it's donating to h anti

564
00:36:10,920 --> 00:36:15,320
Speaker 1: smoking campaign or whatever. So we we have those conversations,

565
00:36:15,400 --> 00:36:18,560
Speaker 1: we sort of lay it out and uh uh in

566
00:36:18,560 --> 00:36:21,520
Speaker 1: a certain fashion that says, okay, well, if you exclude these,

567
00:36:21,680 --> 00:36:23,960
Speaker 1: here's the reason why, here's what you may considering. If

568
00:36:23,960 --> 00:36:27,640
Speaker 1: they still decide to exclude it, that's certainly fine. But

569
00:36:28,200 --> 00:36:31,560
Speaker 1: we just want to make sure that they understand all

570
00:36:31,600 --> 00:36:35,319
Speaker 1: the different angles and and uh see it through that way.

571
00:36:36,160 --> 00:36:38,960
Speaker 1: This attitude on tobacco, I think comes and goes. I

572
00:36:39,080 --> 00:36:42,319
Speaker 1: really I think this is right. I remember not being

573
00:36:42,320 --> 00:36:46,160
Speaker 1: directly related to it, but reading an article about it. Calper's,

574
00:36:46,480 --> 00:36:52,040
Speaker 1: the big pension fund in California, divested themselves of tobaccos

575
00:36:52,080 --> 00:36:53,960
Speaker 1: for some period of time, and then I think I

576
00:36:54,000 --> 00:36:56,640
Speaker 1: read an article in the journal that they had decided

577
00:36:56,640 --> 00:36:58,279
Speaker 1: they had made a mistake and they were going to

578
00:36:58,520 --> 00:37:02,759
Speaker 1: reinvest in tobacco's talks after tobacco stocks at such a

579
00:37:02,800 --> 00:37:06,279
Speaker 1: great performance for four or five years. I have a

580
00:37:06,320 --> 00:37:10,239
Speaker 1: slightly weird question, and I'm not sure either of you

581
00:37:10,280 --> 00:37:14,279
Speaker 1: will be able to answer it, but we mentioned cannabis

582
00:37:14,320 --> 00:37:19,400
Speaker 1: earlier in this episode. To what extent do the economics

583
00:37:19,440 --> 00:37:25,280
Speaker 1: of the cannabis industry resemble the economics of the tobacco

584
00:37:25,400 --> 00:37:28,319
Speaker 1: industry in the sense that, you know, you you have

585
00:37:28,400 --> 00:37:32,680
Speaker 1: a product that people really like. Um, you have you're

586
00:37:32,719 --> 00:37:36,879
Speaker 1: growing a crop essentially, which is similar to tobacco. Could

587
00:37:36,960 --> 00:37:39,960
Speaker 1: you see the cannabis industry following along the lines of

588
00:37:40,000 --> 00:37:43,960
Speaker 1: the tobacco industry if, for instance, you know, tomorrow the

589
00:37:44,000 --> 00:37:48,320
Speaker 1: federal government decided to legalize marijuana across the United States,

590
00:37:48,360 --> 00:37:53,000
Speaker 1: would it take off? And would it resemble tobacco? Others

591
00:37:53,000 --> 00:37:56,960
Speaker 1: offer some thoughts on that, which is and I this

592
00:37:57,200 --> 00:37:59,960
Speaker 1: is this pure conjecture on my part. I actually think

593
00:38:00,000 --> 00:38:02,839
Speaker 1: ink and this is just based on my conversations with

594
00:38:02,840 --> 00:38:05,360
Speaker 1: people who knew a little bit more. Is that I

595
00:38:05,440 --> 00:38:09,800
Speaker 1: almost wonder if the cannabis industry will not more closely

596
00:38:09,840 --> 00:38:13,520
Speaker 1: resemble the alcohol industry and not the tobacco in the

597
00:38:13,600 --> 00:38:19,480
Speaker 1: sense that, um, the side effects of excess alcohol consumption

598
00:38:19,600 --> 00:38:24,120
Speaker 1: more closely resemble cannabis consumption in some ways. And I

599
00:38:24,200 --> 00:38:28,840
Speaker 1: think that some alcohol companies have identified cannabis as a

600
00:38:28,920 --> 00:38:32,920
Speaker 1: threat to their UH bottom line. And I want to

601
00:38:32,920 --> 00:38:35,960
Speaker 1: say that a few companies have actually made investments in

602
00:38:36,320 --> 00:38:41,160
Speaker 1: cannabis to sort of hedge that that risk. Me at

603
00:38:41,200 --> 00:38:46,560
Speaker 1: this point, it seems a little more fragmented. Uh, there's

604
00:38:46,600 --> 00:38:49,640
Speaker 1: not too many established players. It's it's not at all

605
00:38:49,719 --> 00:38:54,239
Speaker 1: clear how profitable their operations have become. I want to

606
00:38:54,280 --> 00:38:57,600
Speaker 1: say that maybe Gene can correct me that the tobacco

607
00:38:57,680 --> 00:39:01,080
Speaker 1: companies were profitable from day one and and really had

608
00:39:01,520 --> 00:39:05,880
Speaker 1: there wasn't much speculation, uh in that space. To me,

609
00:39:05,960 --> 00:39:09,200
Speaker 1: it seems like there's quite a bit of speculation in cannabis.

610
00:39:09,719 --> 00:39:12,320
Speaker 1: So I don't know if that helps at all, but

611
00:39:12,320 --> 00:39:16,200
Speaker 1: but I would say maybe the better comps as the

612
00:39:16,239 --> 00:39:22,880
Speaker 1: alcohol industry for cannabis, not tobacco. Historically, You're right, the

613
00:39:22,920 --> 00:39:28,160
Speaker 1: tobacco industry was amazingly profitable from the very beginning, way

614
00:39:28,160 --> 00:39:31,840
Speaker 1: back in the just post Civil war. It started with smoking,

615
00:39:31,880 --> 00:39:35,680
Speaker 1: with with chewing and smoking the pipe, smoking tobacco's and

616
00:39:35,760 --> 00:39:38,279
Speaker 1: it was profitable from the from the very beginning and

617
00:39:38,360 --> 00:39:41,160
Speaker 1: has continued to be. So if I could just offer

618
00:39:42,120 --> 00:39:45,680
Speaker 1: my take on what an investor should look for going forward,

619
00:39:46,000 --> 00:39:47,960
Speaker 1: and I don't know what the companies are gonna do,

620
00:39:48,560 --> 00:39:50,719
Speaker 1: but the thing I would be looking for from the

621
00:39:50,719 --> 00:39:54,560
Speaker 1: cigarette companies is to face the reality. And I've made

622
00:39:54,560 --> 00:39:59,600
Speaker 1: this analogy before, the cigarette business with this declining base

623
00:39:59,760 --> 00:40:05,280
Speaker 1: of of customers is not unlike an oil producering company,

624
00:40:05,520 --> 00:40:10,080
Speaker 1: a company that's that's got oil wells and you're you're

625
00:40:10,120 --> 00:40:13,760
Speaker 1: on a decline curve here of some dimension. The business

626
00:40:13,880 --> 00:40:16,640
Speaker 1: is going away. The best thing I think that those

627
00:40:16,680 --> 00:40:20,760
Speaker 1: companies can do is if they can find substitute tobacco

628
00:40:20,880 --> 00:40:26,560
Speaker 1: products or tobaco products, that's fine. Otherwise, take that money

629
00:40:26,840 --> 00:40:28,919
Speaker 1: that's being pumped out of the ground, if you will,

630
00:40:29,000 --> 00:40:32,640
Speaker 1: in in my analogy, give it back to the shareholders.

631
00:40:33,000 --> 00:40:36,120
Speaker 1: Don't try to reinvest it. As as Lawrences said, the

632
00:40:36,120 --> 00:40:40,279
Speaker 1: cigarette companies don't need any more capital. You've got, they've

633
00:40:40,280 --> 00:40:43,480
Speaker 1: got planned in place. They may need to modern rise occasionally,

634
00:40:43,800 --> 00:40:48,040
Speaker 1: but the need for more fixed investment is not large.

635
00:40:48,440 --> 00:40:51,960
Speaker 1: It simply is an enormous cash cow. What they do

636
00:40:52,040 --> 00:40:54,640
Speaker 1: with that cash is going to determine, I think, how

637
00:40:54,680 --> 00:40:58,760
Speaker 1: successful they will be as investments for the stockholders. This

638
00:40:58,840 --> 00:41:02,640
Speaker 1: is where looking act R j R. Went down one path,

639
00:41:02,760 --> 00:41:07,000
Speaker 1: Philip Morris went out another. Philip Morris was successful. They

640
00:41:07,080 --> 00:41:10,400
Speaker 1: said they had a more abiding faith in tobacco than

641
00:41:10,480 --> 00:41:13,680
Speaker 1: Reynolds did, and they stayed mostly in the tobacco business.

642
00:41:13,960 --> 00:41:17,799
Speaker 1: They made a side venture into the foods business, which

643
00:41:17,880 --> 00:41:20,840
Speaker 1: was pretty successful when they spun it off. R j R.

644
00:41:21,000 --> 00:41:25,479
Speaker 1: Had an enormous number eight different industries, most of which

645
00:41:25,520 --> 00:41:29,000
Speaker 1: did not work out very well. The reality was, I

646
00:41:29,080 --> 00:41:32,040
Speaker 1: was stunned when I went through the numbers. Over of

647
00:41:32,520 --> 00:41:37,880
Speaker 1: twenty six year period, we invested nineteen billion dollars in

648
00:41:38,480 --> 00:41:43,880
Speaker 1: non tobacco industries. We got back eighteen billion dollars. Our

649
00:41:44,000 --> 00:41:47,319
Speaker 1: return was minus one and a half percent a year compounded.

650
00:41:48,080 --> 00:41:53,319
Speaker 1: Tobacco's profits hid all of those problems. They masked all

651
00:41:53,360 --> 00:41:56,000
Speaker 1: of it, and the company continued to deliver about a

652
00:41:56,040 --> 00:41:59,000
Speaker 1: thirteen and a half to fourteen percent a year compounded return.

653
00:42:00,040 --> 00:42:04,160
Speaker 1: That's super interesting, that analogy to the oil well and declining,

654
00:42:04,200 --> 00:42:07,560
Speaker 1: even throwing off tons of cash. You know, Before we

655
00:42:07,600 --> 00:42:10,319
Speaker 1: go to wrap up, I want to go back. It's

656
00:42:10,320 --> 00:42:14,040
Speaker 1: interesting comparing cannabis to alcohol because I want to ask

657
00:42:14,080 --> 00:42:19,600
Speaker 1: a why haven't the economics of the alcohol industry been

658
00:42:20,480 --> 00:42:24,840
Speaker 1: as strong as tobacco. Why hasn't it been this multidecade

659
00:42:25,360 --> 00:42:28,040
Speaker 1: money printer in the same way in your view? And

660
00:42:28,080 --> 00:42:30,480
Speaker 1: either one of you can answer, And then you know,

661
00:42:30,600 --> 00:42:33,400
Speaker 1: just thinking about industries going forward. We sort of teased

662
00:42:33,440 --> 00:42:36,520
Speaker 1: it um when I mentioned, you know, Facebook and some

663
00:42:36,560 --> 00:42:40,160
Speaker 1: of the big tech companies, Um Lawrence. You mentioned um

664
00:42:40,280 --> 00:42:42,360
Speaker 1: Peter Lynch, and you know, you have this idea of like,

665
00:42:42,400 --> 00:42:44,880
Speaker 1: okay companies, you know is sort of a thing that

666
00:42:44,960 --> 00:42:48,680
Speaker 1: we associate with Peter Lynch. But what are the things

667
00:42:49,440 --> 00:42:51,920
Speaker 1: that would you would look forward to say, okay, this

668
00:42:52,000 --> 00:42:55,520
Speaker 1: has economics that might over a long time be similar

669
00:42:55,600 --> 00:42:58,640
Speaker 1: to what we saw in tobacco. I would say, just

670
00:42:58,880 --> 00:43:02,280
Speaker 1: first of all, on the on the alcohol industry question,

671
00:43:02,400 --> 00:43:07,840
Speaker 1: it is interesting and my understanding is they sort of

672
00:43:08,040 --> 00:43:12,040
Speaker 1: went the opposite way of tobacco with Jimmy Carter deregulating

673
00:43:12,080 --> 00:43:15,759
Speaker 1: the beer industry in the seventies, it became very fragmented.

674
00:43:15,880 --> 00:43:18,040
Speaker 1: You had the rise of a lot of craft brewers,

675
00:43:18,760 --> 00:43:21,560
Speaker 1: some of the big breweries started to lose market share

676
00:43:21,719 --> 00:43:26,239
Speaker 1: and pricing power and so forth. One other interesting dynamic

677
00:43:27,000 --> 00:43:29,320
Speaker 1: I think you've seen play out in this pandemic or

678
00:43:29,400 --> 00:43:33,160
Speaker 1: that hasn't helped the shares at all, is because of

679
00:43:33,200 --> 00:43:37,120
Speaker 1: the restrictions on public smoking, there's not a lot of

680
00:43:37,120 --> 00:43:40,400
Speaker 1: waste that goes into it, whereas you're seeing a drop

681
00:43:40,480 --> 00:43:44,400
Speaker 1: and an alcohol consumption because of the loss of public

682
00:43:44,480 --> 00:43:48,400
Speaker 1: venues at sporting events and concerts and so forth. So

683
00:43:48,920 --> 00:43:51,200
Speaker 1: in a way, there's there's just not a lot of

684
00:43:51,239 --> 00:43:54,879
Speaker 1: waste in the in the tobacco industry from the production standpoint.

685
00:43:55,239 --> 00:43:58,120
Speaker 1: I think there's a lot of different reasons why tobacco

686
00:43:58,239 --> 00:44:02,359
Speaker 1: is unique and alcohol is as sort of uh not

687
00:44:02,520 --> 00:44:05,840
Speaker 1: deliver the same returns. I think they have been okay,

688
00:44:05,840 --> 00:44:08,560
Speaker 1: but but just not as great. And it's just from

689
00:44:08,800 --> 00:44:11,640
Speaker 1: unique dynamics there. When you look at the other sin

690
00:44:11,719 --> 00:44:15,960
Speaker 1: stock industries, um, you know, we compare it to casinos,

691
00:44:16,080 --> 00:44:21,080
Speaker 1: defense names, alcohol and so forth. And I think we

692
00:44:21,200 --> 00:44:24,760
Speaker 1: have this idea that that send stocks do well simply

693
00:44:24,760 --> 00:44:28,280
Speaker 1: because nobody wants to own them. There's an interesting study

694
00:44:28,360 --> 00:44:31,480
Speaker 1: by Robico which which shows that a lot of these

695
00:44:31,800 --> 00:44:35,680
Speaker 1: so called sin industries do well because they're highly profitable.

696
00:44:35,760 --> 00:44:38,919
Speaker 1: So they sell things that that people need and good

697
00:44:38,920 --> 00:44:43,840
Speaker 1: times and bad. They are in a way recession resistant.

698
00:44:44,480 --> 00:44:48,400
Speaker 1: They have a high degree of consistent cash flow, so

699
00:44:48,480 --> 00:44:50,680
Speaker 1: they're not very cyclical at all. They tend to have

700
00:44:50,760 --> 00:44:53,479
Speaker 1: clean balance sheets, so those are sort of proxies for

701
00:44:54,000 --> 00:44:57,880
Speaker 1: what we call the quality and low volatility factors. And

702
00:44:58,000 --> 00:45:00,440
Speaker 1: in a in a lot of ways, and this is

703
00:45:00,560 --> 00:45:05,080
Speaker 1: especially true and tobacco, they very rarely get overvalued. And

704
00:45:05,120 --> 00:45:09,960
Speaker 1: so if you compare that, for example, with Coca Cola

705
00:45:10,000 --> 00:45:13,680
Speaker 1: and and and PEPSI. That's a similar industry in the

706
00:45:13,760 --> 00:45:16,879
Speaker 1: terms of it being more or less a duopoly. Their

707
00:45:16,920 --> 00:45:20,759
Speaker 1: products are more or less recession resistant, highly profitable, tremendous

708
00:45:20,800 --> 00:45:26,440
Speaker 1: brand loyalty, and so forth, but at different periods of

709
00:45:26,480 --> 00:45:29,680
Speaker 1: time they've become very expensive. In the case of Coca Cola,

710
00:45:29,920 --> 00:45:33,279
Speaker 1: it's really been almost bubble like in two instances, the

711
00:45:33,360 --> 00:45:36,840
Speaker 1: late nineties and the early seventies with the nifty fifty.

712
00:45:37,239 --> 00:45:40,920
Speaker 1: That sort of froth has never really happened in tobacco.

713
00:45:41,000 --> 00:45:43,319
Speaker 1: I think about the highest and multiple has ever got

714
00:45:43,440 --> 00:45:45,920
Speaker 1: was the low twenties. I think gene can correct me

715
00:45:45,960 --> 00:45:49,560
Speaker 1: on that. That's pretty high for a low growth industry,

716
00:45:49,600 --> 00:45:52,719
Speaker 1: but it's not so high to the point where it's

717
00:45:52,719 --> 00:45:57,520
Speaker 1: going to impair your returns over time. And so I

718
00:45:57,600 --> 00:46:01,600
Speaker 1: think maybe defense is another indust try that has similar dynamics.

719
00:46:01,640 --> 00:46:05,600
Speaker 1: The returns very rarely um fall out of line from

720
00:46:05,640 --> 00:46:08,880
Speaker 1: a historical pattern. There doesn't seem to be a a

721
00:46:08,880 --> 00:46:12,240
Speaker 1: lot of incidents of excessive valuation. You have the whole

722
00:46:12,800 --> 00:46:15,200
Speaker 1: sort of E s G problem there, with a lot

723
00:46:15,200 --> 00:46:18,560
Speaker 1: of people not willing to own weapons manufacturers and maybe

724
00:46:18,600 --> 00:46:22,920
Speaker 1: that plays a part in keeping valuations under wraps. But again,

725
00:46:23,000 --> 00:46:28,480
Speaker 1: it's a very oligopolistic industry with a lot of consolidation,

726
00:46:28,560 --> 00:46:33,160
Speaker 1: a few major players, very high barriers to entry. Um.

727
00:46:33,200 --> 00:46:35,719
Speaker 1: There's not a lot of those industries around, but but

728
00:46:35,760 --> 00:46:38,680
Speaker 1: there are a few. And I think that's kind of

729
00:46:38,719 --> 00:46:41,800
Speaker 1: what I look for in the in the industry is saying,

730
00:46:41,880 --> 00:46:45,200
Speaker 1: is this a place where, uh, it's it's going to

731
00:46:45,239 --> 00:46:47,960
Speaker 1: be a good place to do business and and look

732
00:46:47,960 --> 00:46:51,000
Speaker 1: at those kind of big picture dynamics and then sort

733
00:46:51,040 --> 00:46:53,920
Speaker 1: of go down from there and and see what are

734
00:46:53,920 --> 00:46:57,719
Speaker 1: the best opportunities for those various players in this industry

735
00:46:57,719 --> 00:47:02,719
Speaker 1: that I know is going to be around for a while. Well, Uh,

736
00:47:03,080 --> 00:47:05,520
Speaker 1: Gene and Lawrence, thank you so much. So I guess

737
00:47:05,520 --> 00:47:10,000
Speaker 1: the lesson is sell addictive sin products and have an oligopoly,

738
00:47:10,200 --> 00:47:12,800
Speaker 1: is it? Is it good? Uh? Is? This is this secret?

739
00:47:12,920 --> 00:47:15,799
Speaker 1: Plus a lot of government regulations and other things that

740
00:47:15,840 --> 00:47:18,960
Speaker 1: make it hard to compete is the secret? But now

741
00:47:18,960 --> 00:47:21,719
Speaker 1: that was fantastic, And really appreciate both of you coming on.

742
00:47:22,080 --> 00:47:24,120
Speaker 1: Thank you for the opportunity. It's a pleasure to be

743
00:47:24,200 --> 00:47:45,120
Speaker 1: with you folks. Thanks for having me. Thank you so much. Uh,

744
00:47:45,280 --> 00:47:48,000
Speaker 1: Tracy I love talking to anyone that just like knows

745
00:47:48,400 --> 00:47:51,239
Speaker 1: a specific industry that well, I mean, both of them

746
00:47:51,560 --> 00:47:56,480
Speaker 1: super interesting. But hearing gene sort of like history of

747
00:47:56,560 --> 00:47:59,319
Speaker 1: how the industry came to be what it is. I

748
00:47:59,360 --> 00:48:03,279
Speaker 1: loved hearing all it. Yeah, absolutely, And it's probably not

749
00:48:03,360 --> 00:48:07,480
Speaker 1: surprising that selling an addictive product can be a real

750
00:48:07,719 --> 00:48:10,560
Speaker 1: money maker over time. I think everyone knows that at

751
00:48:10,560 --> 00:48:14,279
Speaker 1: this point. But just watching how the industry evolved, and

752
00:48:14,360 --> 00:48:19,080
Speaker 1: also seeing how government regulation that was actually supposed to

753
00:48:19,400 --> 00:48:23,560
Speaker 1: clamp down on cigarettes in many ways concentrated power in

754
00:48:23,719 --> 00:48:28,400
Speaker 1: the existing tobacco companies. I thought that was really interesting.

755
00:48:28,600 --> 00:48:33,520
Speaker 1: And also the dynamic between Philip more Morris and R. J.

756
00:48:33,800 --> 00:48:37,080
Speaker 1: Are how one of them was basically very successful and

757
00:48:37,120 --> 00:48:41,040
Speaker 1: the other one kind of foundered, foundered just because um,

758
00:48:41,200 --> 00:48:44,400
Speaker 1: well of different strategies, you still had an oligopoly, but

759
00:48:44,880 --> 00:48:48,960
Speaker 1: vastly different outcomes. That was really interesting just hearing like

760
00:48:49,040 --> 00:48:51,720
Speaker 1: all of the different things that sort of like set

761
00:48:51,800 --> 00:48:55,120
Speaker 1: this industry on its way to being a sort of

762
00:48:55,360 --> 00:48:59,319
Speaker 1: a unique asset class. From an investor perspective, I still

763
00:48:59,360 --> 00:49:02,320
Speaker 1: thought that was really interesting. I love genes analogy about

764
00:49:02,400 --> 00:49:05,000
Speaker 1: like Okay, you're sitting on an oil well, you know,

765
00:49:05,080 --> 00:49:08,839
Speaker 1: the oil well has almost only so much life in it, right,

766
00:49:08,880 --> 00:49:11,040
Speaker 1: Like there is a finite amount of oil, and maybe

767
00:49:11,080 --> 00:49:13,720
Speaker 1: there is a finite amount of people who will ever

768
00:49:13,760 --> 00:49:17,359
Speaker 1: smoke cigarettes. And so the question is do you take

769
00:49:17,400 --> 00:49:19,880
Speaker 1: that cash and try to find the next oil or

770
00:49:19,920 --> 00:49:22,600
Speaker 1: the next cigarette, or do you just you know, keep

771
00:49:22,680 --> 00:49:24,839
Speaker 1: disciplined with that cash, don't try to find the new thing,

772
00:49:24,880 --> 00:49:27,520
Speaker 1: reinvest in the business and give a lot of money

773
00:49:27,560 --> 00:49:32,240
Speaker 1: back to shareholders, and the sort of the divergent paths,

774
00:49:32,280 --> 00:49:34,880
Speaker 1: and in the end, sounds like the companies that just

775
00:49:34,920 --> 00:49:38,000
Speaker 1: sort of stuck to their knitting and bet on tobacco

776
00:49:38,480 --> 00:49:40,440
Speaker 1: as opposed to trying to find the next big thing,

777
00:49:40,440 --> 00:49:43,360
Speaker 1: we're the ones that went out. Yeah, I mean another

778
00:49:43,400 --> 00:49:45,880
Speaker 1: one of the surprises in that conversation was that R

779
00:49:45,960 --> 00:49:49,799
Speaker 1: j R. Was the company that diversified, which is what

780
00:49:49,840 --> 00:49:53,680
Speaker 1: you're traditionally supposed to do when you have a product

781
00:49:53,800 --> 00:49:57,399
Speaker 1: that's falling out of favor, and they did a lot

782
00:49:57,440 --> 00:49:59,600
Speaker 1: worse than Philip Morris. You know what I was kind

783
00:49:59,600 --> 00:50:03,880
Speaker 1: of thinking during that oil analogy, maybe the tobacco company

784
00:50:03,920 --> 00:50:06,480
Speaker 1: should set up like a sovereign wealth fund right with

785
00:50:06,520 --> 00:50:12,160
Speaker 1: their capital if they're just trust Yeah, yeah, they might

786
00:50:12,160 --> 00:50:14,360
Speaker 1: as well write if they're going to give up on

787
00:50:14,400 --> 00:50:17,200
Speaker 1: tobacco products eventually. I mean, I guess, you know, I

788
00:50:17,200 --> 00:50:19,640
Speaker 1: don't know. It'd be interesting to hear to get into

789
00:50:19,680 --> 00:50:24,000
Speaker 1: a further conversation about the the sort of master settlement agreement,

790
00:50:24,040 --> 00:50:26,160
Speaker 1: because I kind of feel like there might be an

791
00:50:26,200 --> 00:50:31,080
Speaker 1: analogy there between state sovereign wealth funds in oil rich

792
00:50:31,640 --> 00:50:35,680
Speaker 1: countries and the funds that various well literal u s

793
00:50:35,680 --> 00:50:39,880
Speaker 1: states have set up with that sort of recurring royalty

794
00:50:40,000 --> 00:50:44,800
Speaker 1: stream from that settlement agreement from tobacco companies. There's probably

795
00:50:44,960 --> 00:50:48,120
Speaker 1: there's probably actually a lot to uh draw there in

796
00:50:48,239 --> 00:50:50,920
Speaker 1: terms of comparisons, and then how that cash would you

797
00:50:50,960 --> 00:50:53,560
Speaker 1: use and how that cash is sort of funneled to

798
00:50:54,200 --> 00:50:57,479
Speaker 1: public authorities. Yeah, I think you're right. Well, I guess

799
00:50:57,520 --> 00:51:01,319
Speaker 1: we have another idea for an episode then up one day.

800
00:51:01,880 --> 00:51:04,600
Speaker 1: All right, shall we leave it there? Let's leave it there,

801
00:51:05,080 --> 00:51:07,920
Speaker 1: all right. This has been another episode of the All

802
00:51:07,960 --> 00:51:10,799
Speaker 1: Thoughts podcast. I'm Tracy Halloway. You can follow me on

803
00:51:10,840 --> 00:51:14,279
Speaker 1: Twitter at Tracy Halloway and I'm Joe wi isn't Thal.

804
00:51:14,400 --> 00:51:17,719
Speaker 1: You can follow me on Twitter at the Stalwart and

805
00:51:17,800 --> 00:51:21,560
Speaker 1: follow our guests on Twitter Lawrence Hampton, He's at el Hampton.

806
00:51:21,960 --> 00:51:24,160
Speaker 1: I don't think Gene is on Twitter, but you can

807
00:51:24,280 --> 00:51:27,520
Speaker 1: check out his book Going Down Tobacco Road. R J.

808
00:51:27,719 --> 00:51:31,520
Speaker 1: Reynolds Tobacco Empire at The gold Leaf and North Carolina,

809
00:51:32,040 --> 00:51:35,000
Speaker 1: and be sure to follow our producer Laura Carlton. She's

810
00:51:35,080 --> 00:51:38,520
Speaker 1: at Laura M. Carlton. Followed the Bloomberg head of podcast,

811
00:51:38,600 --> 00:51:42,360
Speaker 1: Francesca Levi at Francesca Today and check out all of

812
00:51:42,400 --> 00:52:15,520
Speaker 1: our podcasts under the handle at podcast. Thanks for listening

813
00:52:00,080 --> 00:52:00,120
Speaker 1: to