Fayez Sarofim’s Philip Morris Investment

Fayez Sarofim is a Houston-based investor that I occasionally cover on the blog because he is someone other than Warren Buffett and Charlie Munger that has seen his fortune climb on the coattails of buying-and-holding consumer stock investments. Coke, Nestle, McDonald’s–you name it–he bought it decades ago and holds it on the balance sheet of his Fayez Sarofim & Co. today.

After I published my recent article on Philip Morris International’s recent stock performance, Sarofim’s firm crossed my mind because I know that Philip Morris International (PM) is the investment that catapulted his own way from poverty in Egypt to a gilt-edged life of material success in the United States. To date, Sarofim finds himself sitting on 16,711,214 shares of PM stock.

An aside to precede my commentary: Did you guys see that post on the Mr. Money Mustache website about a year ago when Peter Adeney talks about how it was much easier to build additional wealth once he was financially successful compared to when he was starting out and hungry for it?

It sounds a little bit counterintuitive, but the advantage that comes from pre-existing wealth is that you can afford to take the long view. This advantage was best explained by a character in the Terry Pratchett work “Men At Arms” and is called The Boots Theory of Social Inequity:

“The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money.

Take boots, for example. He earned thirty-eight dollars a month plus allowances. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles.

But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that’d still be keeping his feet dry in ten years’ time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.”

Put another way, it is a competitive advantage to be able to act upon your intellect and reason. If you calculate that the up-front costs for something are high but are the best option when measured across the entire contemplated use, you want to be able to have the actual cash on hand to pursue the more intelligent option.

The Vimes Theory and the MMM post express a philosophy that I imagine is executed by Fayez Sarofim in the stewardship of the firm’s assets.

If someone only owns 30 shares of Philip Morris International, the lack of price movement over the past four years might make you anxious and impatient. Everyone is talking about a bull market while that stock seems like the proverbial dead money. I’m sure someone on Seeking Alpha is probably putting it on probation or whatever term they use to say “Bad boy!” to their investments nowadays.

So what impulse does this need to get rich quickly trigger? Sell low!

On the other hand, consider how Fayez Sarofim can approach the lack of price movement.

In the past, Sarofim has said that studies of tobacco industry economics have left him breathless because the torrents of cash flows were so tremendous that it could enable Big Tobacco the cash cushion to purchase America’s leading food stocks (which have since been spun off).

He is already extremely rich, so he can afford the long game. He can enjoy the fact that his experience with the stock from a position of wealth is far more enjoyable. Between 2014 and 2016, Philip Morris International paid out $12.04 in dividends. When you own 16,711,214 shares, you do not view this as a “dead money” operation. You got to collect over $200 million in pure cash dividends as your share of profit from the investment. When your cash dividends are so extreme that you could buy hockey teams just by letting the tobacco dividends pile up for a few years, you are not going to fixate on the share price–no one is cursing at their Bloomberg Terminal when their holdings mail them dividend checks with two commas.

But this situation doesn’t only make Sarofim richer in the here and now. He can also look at the fact that Philip Morris International reduced its share count from 2 billion in 2008 to 1.5 billion in 2013 before the global currencies tightened against the dollar. He can see that this situation will temper or reverse, and within the next twenty-four months, Philip Morris will again have the free cash flow to repurchase its own stock. That, in turn, ought to improve earnings growth from 5.5% to 8-9%. That will bring about commensurate capital gains and dividend growth.

Assume that the future expectations in the paragraph above are held by Sarofim and my hypothetical investor. Who do you think is in a better position to actually be around in 2018 and 2019 to reap those higher returns–the frustrated guy with the “dead money” investment that isn’t permitting him to enjoy lifestyle upgrades or the guy that is collecting $70 million per year as the reward for being patient?

Sources Consulted:

Boots Theory of Economic Unfairness

Fayez Sarofim: A Lion In Winter

Philip Morris International: Major Shareholders

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