DRIP PORTFOLIO

The Drip Portfolio
Philip Morris Butted Out
Round one leaves three companies standing

By Jeff Fischer (TMF Jeff)

JUPITER, FL (Nov. 10, 1999) -- Since we first considered Philip Morris (NYSE: MO) in early 1998 (click here for the articles), the stock has declined over 45%, helped only by a dividend yield that has averaged over 4% annually and has, with the falling stock, risen to top 7% this year. As the stock has fallen since late 1997, we have heard very little about the company's actual business, be it the Kraft division, its Miller beer division, or its tobacco division. We have heard almost exclusively about the company's legal problems.

These legal problems are not likely to subside anytime soon, but instead could proliferate and gain momentum based on legal proceedings being held against the company right now. Courts are making legal decisions that five years ago would have been thought extreme, but are now being generally accepted. Sue for secondhand smoke damage? Sure. A tobacco company can be liable for one's death from smoking? According to a precedent-setting court ruling, it appear so. Family members can seek reparation for the smoking death of relatives? That is the direction of things.

And as ptiny points out on the Drip message board, it isn't just tobacco that is under fire. Gun companies are beginning to see lawsuits, too -- suits claiming that the manufacturer is responsible for a firearm death or maiming. So ptiny hypothesizes, logically, that if legal momentum continues in the same direction, alcohol (Philip Morris' third largest division) could be next. Imagine the company lawsuits made possible regarding driving while intoxicated incidents, or death by drinking. I'm not saying the lawsuits are right. Every person is responsible for his or her actions, and victims in their wake should seek damages from the perpetrator first and foremost. But whether this legal trend is right or wrong, it introduces serious long-term risks to investments in companies that depend upon tobacco, firearms, or alcohol for their revenues.

Legal proceedings needn't proceed any time soon, either. Wall Street hates simple and fluid uncertainty as much as it dislikes a hardened negative outcome. Therefore, the specter of possible future legal damages is enough to keep stocks down.

When we first looked at Philip Morris, we estimated that legal damages claimed against the company could reach into hundreds of billions of dollars. If legal damages were considerably less or proved nonexistent, however, the stock could prove greatly undervalued. So far, the former situation is proving true. Meanwhile, the stock has only fallen, proving to offer anything but a good value the past handful of years.

This demonstrates an important point that we don't make enough: Value is rarely "comparative"! Just because Philip Morris has appeared inexpensive when compared to other blue chip stocks, it doesn't mean that it is a good value. Comparatively, 3Com (Nasdaq: COMS) looks very cheap at $10 billion next to Cisco Systems (Nasdaq: CSCO) at $215 billion, and 3Com has looked comparatively cheap for a long time. But Cisco's stock has crushed 3Com's, and this price difference will almost certainly continue. 3Com and Cisco are valued very differently for a reason. Philip Morris is valued very differently from other blue chips for a reason, too.

It is difficult to say that a stock looks cheap when a legal proceeding against the company could theoretically render it bankrupt. Standing beneath such a large threat, a threat as sharp as a guillotine, a stock may be regarded as expensive at any price. (Two weeks ago, Tom Gardner predicted on the Fool Radio Show that Philip Morris will be bankrupt within two decades.)

Not only is Philip Morris' business under considerable fire -- fire that is likely to continue for a long time -- but its management has been anything but forthcoming through the ordeal. Obviously, the company's management has obscured facts in the interest of survival. But it has been a losing battle. It was found that the company did indeed market cigarettes to minors. And it was found that the company did indeed hide facts from the public when studies showed cigarette smoking caused death and cancer. Despite these findings, management continued to attempt to bat away the truth while on the stand in court. It was only last month that the company admitted smoking increases health risks.

In Florida, where the largest trial is occurring, an organization has paid a great sum to run advertisements and clips on television that rally against the company and industry. One series of clips shows the Philip Morris CEO in court dodging every question asked of him. Questions such as, "In light of all the scientific findings, do you admit that smoking causes cancer?" The response, paraphrased, "We can't conclude from the evidence that smoking does indeed cause cancer. We don't feel the evidence is conclusive, that, uh, smoking causes cancer."

Another question asked of the Philip Morris executive: "Would you advise your daughter to smoke or not to smoke?" The answer, paraphrased again, "It wouldn't matter what I would advise her, because based on the evidence she would make her own decision." The question is restated: "So, would you advise her to smoke or to not smoke?" "It wouldn't matter what I would advise her. She would decide on her own based on the evidence and facts available to her." And the charade goes on.

We have a company that is being hanged right now and whether it is a witch hunt or not doesn't matter -- it is happening. We have a company that has deceived the public and targeted children with its harmful and addictive product. We have a company run by management that continues to be wishy-washy at best while under fire. And we have a stock that continues to fall as multi-billion-dollar lawsuits hang in the balance.

Yes, I think that we'll skip it.

Even without all of these circumstances -- even if Philip Morris was running full steam and without hindrance -- I wouldn't invest in a tobacco company. Again, as with yesterday, the decision is a personal one that every person must make on his or her own. I like to invest in companies that I believe are doing much more good for society than harm. On the Drip message board, tmackfool posted a fine message regarding how emotional considerations can play into investing. I believe that feeling good about your investments leads to a healthier investing career.

With Brown-Forman (NYSE: BF.A) and Philip Morris snubbed, we reach a list of three finalists for possible investment: PepsiCo (NYSE: PEP), Coca-Cola (NYSE: KO), and Wrigley (NYSE: WWY). Which company is likely to serve us best over the next 17 years?

To post your thoughts about this column, please visit the Drip Companies message board.

Related Links:
Our initial columns and conclusion on Philip Morris, 1998
Drip Basics message board
Philip Morris message board

Drip Portfolio

11/10/99 Closing Numbers
Ticker Company Dly Pr Chg Price
CPBCAMPBELL SOUPUnch.$45.00
INTCINTEL CORP-1 1/16$79.00
JNJJOHNSON & JOHNSON-5/8$103.00
MELMELLON FINANCIAL CORP-1/16$36.81

  Day Week Month Year
To Date
Since
7/28/97
Annualized
Drip -.74% -2.77% .24% 18.43% 34.70% 13.90%
S&P 500 .60% .24% .77% 11.73% 46.30% 18.09%
S&P 500(DA) .60% .24% .77% 12.31% 48.93% 19.01%
S&P 500(DCA) n/a n/a n/a n/a 24.69% 10.12%
NASDAQ .99% 1.73% 6.39% 43.93% 101.07% 35.69%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/9721.0839INTC42.592$79.0085.48%
11/14/9711.258JNJ79.965$103.0028.81%
11/5/9825.5267MEL34.137$36.817.84%
4/13/988.174CPB54.586$45.00-17.56%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/9721.0839INTC$898.01$1,665.63$767.61
11/14/9711.258JNJ$900.24$1,159.57$259.33
11/5/9825.5267MEL$871.40$939.70$68.30
4/13/988.174CPB$446.18$367.83($78.35)
  Cash: $24.38  
  Total: $4,157.11  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.