The Ethics of Tobacco Investing Revisited

A great question from reader Joe left as a comment on a previous article:


This question isn’t directly related to this post but I’d still like to get your thoughts on an investing concern that has been on my mind lately. To what extent do you view your investing life as an extension of your personal life?By that I mean to what extent do the personal morals and ethical values of Tim the man govern the investing decisions of Tim the dividend growth investor?If you ask your typical dividend growth investor if they would be willing to invest in a lucrative but immoral venture, say selling child pornography or crack cocaine, the answer would probably be “absolutely not” regardless of the yield, valuation or growth prospects of the underlying venture.And yet, ask that same investor what their thoughts are about Phillip Morris and they would probably describe what a wonderful investment it is and go on about why you should own it.Do your personal morals ever come into play when buying companies, or do you compartmentalize your conscience, wall it off from the part of your brain that thinks about investments, and make your investing decisions based on the financial prospects of the company?The reason why I’m asking is that I keep identifying stocks of companies that I love from an investing perspective but despise on a human level.I cannot in good conscience own any piece of Phillip Morris knowing the impact that smoking related illness has on the families of smokers.You might say that the smoker made his choice to smoke so you don’t mind taking his money, but his children never made that choice and they are the ones who will suffer when he dies 20 years too soon. I can think of many other examples of lucrative and growing businesses that I cannot and will not own because their primary mission is immoral and destructive.

Joe, great question. My favorite quote that about sums up my thinking on this topic comes from Warren Buffett, who said: “There are 250,000 employees at Berkshire Hathaway. I guarantee you that someone, somewhere is doing something at Berkshire that we do not like.” If you are going to be an enterprise worth billions of dollars, you are going to have business lines and employees that are doing something unethical at any given moment.

Generally, I’m satisfied with the way things are in America because if you want information, you can get it. If someone at a 2 Big Macs, 3 large fries, and several refills of soda every day at McDonalds with no exception, they will trim days off their lives. They will get diabetes. They will get fat. Maybe heart disease. The point is, bad things will happen. Yet, we can look up the calories and health information for every single food product that exists under the McDonalds umbrella.

I just opened up a browser window on my computer, googled the calorie counts for food at McDonalds, and brought this spreadsheet up:

There’s no deceit. There’s no fraud. How can I not respect the right of an adult to act of his own free will to make decisions in life? If you go to McDonalds and get a Coca-Cola for a $1, you can pull out your phone and know right away that the 30 fluid ounce cups contain 280 calories. The knowledge is right there, at my disposal.

In some ways, this is what I love about business: it shows how Americans truly behave, rather than how we want them to behave. When you look at the net profits for Altria (tobacco), Exxon Mobil (oil and gas), McDonalds (fast food), Anheuser-Busch (beer), and Lockheed Martin (defense weaponry), you will see that this is a nation that likes getting drunk, roaming around, eating like an emaciated animal, all with the option to blow things up. You can see it in the profits of these companies, driven by consumer demand, that increases each year. The long-term money is often made by recognizing how humans truly are, rather than what we want them to be (that’s why socially responsible funds don’t pan out, usually).

There are moral theories out there that also hold those accountable who facilitate harm, under the “don’t hand a suicidal man a gun” theory whose origins get traced back to Thomas Aquinas. Is the world a better place because cigarette peddlers exist? Is it a better place because Ray Kroc brought cheeseburgers to the masses? That’s a harder argument to make–the world isn’t filled with scores of people saying, “Thank God I started smoking cigarettes. That’s what really got my life together.” Or “My wife never would’ve gone on a first date with me if I didn’t eat at McDonalds every day.”

On the other hand, a large reason why 401(k)’s, pensions, and so on have done so well over the past 20-50 years is a result of the strength of Big Tobacco. Over almost any super-long period, the old Philip Morris had long-term returns of almost 20%. Given its longevity and super outsized returns, my guess is that the 10% annual return figure that large-cap American stocks provided from 1926 through 2006 would be noticeably lower without the inclusion of the tobacco stocks.

Imagine a thirty-year old that bought $10,000 worth of the old Philip Morris in 1970. Today, he would have shares of Altria, Philip Morris International, Kraft, and Mondelez worth over $35 million. Short of finding Warren Buffett in Omaha, there are almost no other ways that someone could come up with that kind of wealth today without tobacco investing. If he decides to cash those chips in and set up a $30 million charity that provides a warm shelter for the homeless during the winter months (leaving the other $5 million for himself, his spouse, and kids), then all of those people that are provided a warm dwelling for a night will have smoking cigarettes to thank. Sure, the people sleeping at or working at the shelter may never know this fact, but the person who sets up the charity will go to his grave knowing that his good mark left on the world was built on the back of tobacco smoking.

And you can’t really say: “Oh, just buy other good investments.” Take something like Procter & Gamble–since 1970, a $10,000 investment would have grown into $1.7 million. That is worlds apart away from $35 million. The difference between 12.5% and 20.0% compounding over large periods of time is enormous. The old guard tobacco companies have historically created staggering wealth unmatched by almost all peers, thus creating a greater capacity to do good for those who own their stocks.

You may not think that tobacco serves a useful function in the economy, but it has given so much wealth to its long-term owners over the years that, if they decide to use those funds for charitable pursuits, they would be able to accomplish a net good almost unparalleled by any other prospective investment. If tobacco didn’t exist, the avenue to turn $10,000 into a $30 million charity within 44 years would not exist. There’s no other large-cap opportunities that have performed as well as Big Tobacco.

If I wanted to bring purity to my investment decisions, I’d probably be relegated to trying to buy real estate and living off of those rents. Even then, I’d probably have to get a door knob manufactured by General Electric, and they have polluted the atmosphere and created nuclear reactors with unstable designs, putting the lives of millions at risk were it not for government oversight. And what if I have a couple guys over to help paint the rental house, and I get some SABMiller beer products to drink in between finishing rooms? Well, Altria owns 27% of SABMiller, so I’m back to supporting Big Tobacco again. Up until somewhat recently, any time you ate an Oreo cookie you were supporting Big Tobacco.

With all those things said, there are two excellent firms (from a business perspective) whose stock I would never want to own. So yes, personal morality does come into play. One is a company that is dedicated to outsourcing–removing “high-cost jobs” from the United States and shipping them overseas, and I don’t really want to be a part owner of a company whose purpose is to gut out our country. Additionally, there is a large agricultural firm that has possibly the worst business ethics I’ve ever seen, using litigation as a bullying tool, lobbying Congress in a way unmatched by any peer in a way that comes at a great cost to society, and is so secretive about its unethical business practices that it would likely be an outrage on par with Upton Sinclair’s “The Jungle” days if the full extent of what they have done were to ever see the light of day. So I’ll go about life without owning them.

A lot of times, public forums about moral investing turn into a game of calling each other a hypocrite. “You won’t buy a company that raises the rate of unemployment–I’d rather be unemployed than dead if I smoked cigarettes!” And then the other person will say, “I’m an adult that knows about the health consequences of cigarettes, and any time I smoke, I choose to do it. You don’t have much of a choice when it comes to getting laid off from a job.” A lot of people shy away from writing those types of articles because it turns into a circus, and most of the dialogue afterwards is filled with negative energy.

I get why people don’t buy tobacco stocks. Almost everyone has been negatively impacted by tobacco in some way. On my dad’s side of the family, no one had to make my grandfather breakfast because “he could light his own damn cigarette.” It’s very likely his life was cut short a few years because smoking 2-3 packs per day for 60 years is not the key to longevity. If every dollar he spent consuming tobacco had been used to buy the stock of the old Philip Morris, he would have had a $140 million fortune, a net worth higher than the combined salaries of every member of the 2013 St. Louis Cardinals (his favorite baseball team).

Warren Buffett said he drinks 5 Cherry Cokes per day and frequents Dairy Queen regularly. At one point in his life, he ate a lot of doughnuts, which we’ll assume were manufactured by one of the baking divisions under the Berkshire umbrella. If you buy Berkshire Hathaway stock, you are buying interests in those cheeseburgers, sodas, and doughnuts. Who dies first: the guy who wakes up, eats a cheeseburger and fries, has a couple doughnuts, and drinks soda all day, or the guy who smokes? I can’t see a huge difference between the ethics of either.

Morality with investing is a tricky subject–the Big Oil companies like Exxon, Chevron, and Conoco are not particularly popular with the American public. Yet the highest quality people, in terms of character and intelligence, that I knew at Washington & Lee when I was in college, went on to become petroleum engineers. Oil stocks have provided pension and 401(k) income for almost a century, and paid the taxes used to build our roads, national defense, and general needs of our country.

If you study any company hard enough, you will find things you don’t like. If you react the same way to Altria, Lorillard, Reynolds, or Philip Morris as I do to the agricultural or outsourcing firm that I studied, then it makes sense not to buy. In a $15 trillion economy, you can find ways to make money without hating yourself. But if you are looking for purity, I don’t think too many S&P 500 companies will pass the test. Worrying about the ethics of companies doesn’t have much of a desirable payoff–after all, you can boycott Altria all you want, but someone is going to own those 2,000,000,000 shares. The best use of energy seems to be focusing on the good you can do with the wealth you acquire: I’d rather spend 1,000 hours working and doing something productive that has a direct benefit on the community I live in, rather than spend that time studying the nooks and crannies of American companies, looking for reasons to cross them off my potential investment list. If your life’s purpose is to create high-impact good, then working and doing something intelligent with the wealth you build is where I’d devote the overwhelming bulk of my energy.

By the way, Joe, you win. I’m running late to the Super Bowl party I’m attending because I got so caught up focusing on your question. Well done.

Originally posted 2014-02-02 17:24:22.

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14 thoughts on “The Ethics of Tobacco Investing Revisited

  1. says:

    Tim, I think the ethics on this matter are complex, as you suggest, and I don’t begrudge you or anyone else your tobacco investments. But I’d like to try to simplify it for myself by framing it in a way that you often emphasize with investing: that we should always bear in mind that we become part owners of the companies we are investing in. So from that frame, I ask myself not only whether I want to pile on as another owner of a company by investing in it, but whether I would feel good about starting such a company myself. Would I start a tobacco company and then try to interest others in investing along with me? The answer to that is decidedly not. It wouldn’t sit well with me to launch a company so inherently destructive to human life. Then why would it be any different for me to buy in now as an investor/owner?
    Ownership is ownership, it seems to me, and I don’t think I’d feel too good telling my friends & family at our next Christmas gathering, “Guess what—I’ve decided to start a tobacco company guaranteed to take years & years off my customers’ lives and make many of them die wretched, lingering deaths! Wanna buy some shares?”

    I know there are many shades of gray in this whole matter and that purity is impossible—but within those constraints, I think we can still strive to make investment decisions that discriminate between “bad” and “worse,” or “problematic” and “indefensible.” And if we allow for such distinctions, fast food and weapons manufacturers may be problematic, but I don’t see how tobacco companies are anything but indefensible.

    Thanks to you and Joe for a thought-provoking post.

  2. scchan_2009 says:

    Ethics are indeed a tricky issue, and every large organization will indeed have bad apples. I think Lynch once said that you will always find something you do not like in any investment you make.

    For tobacco: I find myself that I do not need to with deal with them and I can still find reasonable opportunities elsewhere. I know those alternatives will have tons of problem (as a long-term Walmart and Boeing shareholder, what good riddance – laugh; do you think I do not know Walmart’s bad public perception and Boeing UAVs and military aircraft had killed people?)

    I do wish to warn against “ethical and sustainable investment”. So biofuels and wind energy sound cool? Those guys make no money and have to take government subsidies. It makes no business sense to invest in them. However, there are companies do operate with generally higher ethical standards and do provide real solutions to real problems (like Bill Gates’ favourite: Ecolab). However, I am sure there are bad apples in Ecolab if you take your time to dig them out.

    PS: As a disclaimer: Ecolab and Boeing do look a bit expensive lately, but I guess we will need sanitation systems and 747s for the foreseeable future 🙂 I was looking at PMI price lately, and PMI was trading at 52-week low right now with a high dividend yield.

  3. scchan_2009 says:

    One more thing about this: ” A lot of people shy away from writing those types of articles because
    it turns into a circus, and most of the dialogue afterwards is filled
    with negative energy.”
    IMO Political correctness is a huge problem. There is little to gain for the person who speak out the obvious, and the person might just as keep his/her mouth shut.

    The thing about the activists are that making noises are their job. The same can be said for the tobacco or NRA lobbyists in DC. You really can’t trust the folks in being honest and realistic when his/her jobs depends on not being honest and realistic. If you give a pretext for those environment or gun-is-freedom activists to politically attack you, you will get attacked with 100% probability. Period.

  4. scchan_2009 says:

    I will have to say jails ran by a publicly traded company is really American. I have never heard they do that in other countries. That is unlike Big Tobacco and Big Oil.

  5. scchan_2009 says:

    I think it is sensible to look after one’s interest, and I do think it is possible to do reasonably good while doing reasonably well. The reason I invested in Boeing – bought it couple of years ago – while I am aware Boeing is involved in arms trade (as member of the Military Industrial Complex), I also aware Boeing had created some of the most marvellous aerospace engineering products which greatly reduced the distances between different nations and distance. Growing up as an aviation fan and Boeing were reasonably price at that time, I rationalised that Boeing is a reasonable investment.
    I had also invested in Big Oil as a shareholder of NOV and Statoil. Some may argue oil industry may be damaging the environment, but there is no way the world can forego oil and gas in the reasonable future (that is why I highly critical about alternate energy – it just isn’t a viable alternative and is eating taxpayer money via subsidy. Subsidies cause market distortions that real solutions cannot be found (both the Greens and Big Oil are nuclear and hydro haters…)
    Then here comes Big Tobacco. A reason that I am not a fan with Big Tobacco as an investment is its regulatory and political risks. I prefer companies that don’t have to be always at war in political lobby and court room. The worst thing legally can happen to BA or NOV is they get sued after a plane crash or oil well was caught leaking. That may cause a short term issue to the company (like what BP after Gulf mess or the 787 problems), but Big Tobacco legal and political issue is going to be chronic for the foreseeable future. I do see a way out to the public health mess they are in. E cigarette, as of now, poses no known health risk (as in relative to booze and caffeine).
    The Military Industrial Complex and Big Oil may not be a fan of many, but we need them to exist for our economy to function, so people learned to deal, tolerate, and love their existence. I am not so sure if the same applies to Big Tobacco.

  6. BigIslandBum says:

    Very well said Tim.

    “Additionally, there is a large agricultural firm that has possibly the worst business ethics I’ve ever seen, using litigation as a bullying tool, lobbying Congress in a way unmatched by any peer in a way that comes at a great cost to society, and is so secretive about its unethical business practices that it would likely be an outrage on par with Upton Sinclair’s “The Jungle” days if the full extent of what they have done were to ever see the light of day.”

    Sounds very much like the only company on my list of “never own” : Monsanto

  7. scchan_2009 says:

    I think Monsanto badly managed its own reputation. Really they don’t really need to be like that, and the mess is self inflicted. Can Monsanto CEO pick up the phone and call ADM, Deere and PotashCorp in how to do PR properly?
    The whole GM crop debate is made more difficult just because of Monsanto reputation.

  8. Joe_G from Seeking Alpha says:

    Tim, thanks for responding to my question with such a thorough and thoughtful response.  I think your attitude is close to where I fall on the topic as well, that purity is not practical but that there do need to be lines drawn somewhere.  The importance of drawing lines that cannot be crossed is to allow us as investors to sleep well at night.  I draw my line at tobacco companies and the returns I forfeit by not owning tobacco stocks represent the price of a good night’s sleep.

  9. says:

    Tim, great article per usual. Obviously all of your points carry weight and you bring an interesting (and rarely talked about) perspective to the table. I especially liked the “useful function” discussion. Two simple notes:

    I think the relative disdain for cigarettes is a result of the idea that it’s very difficult to pull a “general good” out of the process. You can walk to your local McDonald’s, grab a salad or wrap and likely be slightly better off. Yet it’s hard to make that argument with any type of cigarette. True, this is at the core of “well, too many cheeseburgers are bad for your health as well” argument. However, I’m not sure it holds up in the same way. After-all even drinking too much water can kill a person.

    Also CVS just announced that they will no longer be selling cigarettes: could be an interesting dynamic moving forward if other companies happen to follow suit.

    Thanks for all of your work!

  10. scchan_2009 says:

    Recently I reading (and watching) writing and video presentations by Terry Smith – a former floor broker and now CEO of a fund and brokerage firm. One of his video (you can find on the front page of his own website ) that he has commented on ethics in picking stock. He actually made a very strong case for investing tobacco – it is not the job of the manager or individual investor job to make morale judgements, their job is to maximize long-term return. 
    Moral judgements are difficult to make as Smith made an example in the video: according to Islam, you aren’t allow to drink, but it is okay to smoke; so does that make investing in booze worse than smoke? Muslims may find Diageo and SAB Miller more revolting than Philip Morris and BAT.  So yes he is a bull in tobacco, and you can even search his writings on Financial Times (he wrote a big bull thesis for Gates/Allen/Ballmer Co. on the biggest UK financial news website despite how much many analysts and SA users hate MSFT – google FT Terry Smith)

    It is an interesting video to watch for the whole thing. Smith is an interesting fellow, he got fired 20 some years ago from UBS because he wrote a book how accounting firms cook the books for companies (laugh).

  11. jheathcliff says:

    Andrew Hidas  Andrew, that is an exceptional insight. Ownership is ownership.  An individual owner has the right and the responsibility for acting according to his/her own moral, ethical, and social standards, insofar as his/her actions do not infringe upon another’s ability to exercise his/her rights.  In the case of an owner of a tobacco enterprise, the owner may be acting in a way that diminishes other’s rights.  For example, the right to pay health insurance premiums and taxes that reflect healthy behavior, not the self-injurious behavior of tobacco users who incur higher healthcare and disability costs.  However, pension funds, endowments, and philanthropies invest money on behalf of millions of largely silent owners.  Yet as owners, they still retain the right to tell these institutions how they want their money invested.  Finally, let me suggest a new thought:  With respect to tobacco, investors are no different than consumers and should be treated accordingly.  Tobacco consumers pay tobacco taxes for the right to enjoy tobacco because their smoking has financial consequences for taxpayers and healthcare policy holders.  Similarly, tobacco investors should be required to pay a tax premium for capital gains realized on their tobacco investments.  Thanks to Joe, too, for an excellent job of kicking this off.   John

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