MPR: Tobacco Trial: The Impact on Personal Finances

Tobacco Trial: The Impact on Personal Finances
By Bill Catlin
January 22, 1998

Minnesotans may not realize that the state's tobacco lawsuit has the potential to affect their personal finances. In all likelihood, a large number of Minnesotans have a financial stake in the tobacco industry, through the stock holdings of their pension funds, or mutual funds, and even simply as state taxpayers. And Minnesota's lawsuit against the industry is expected to have a potentially powerful impact on tobacco company stocks.

SFX: A trading floor.

The trading floor at the Minneapolis brokerage firm, John G. Kinnard and company. A dozen or so traders each oversee two enormous computer screens. The screens are cluttered with numbers - stock prices, trades, portfolio holdings. They open a window on the electronic churning of hundreds of millions of shares of stock changing hands each day in the financial markets. It is in trading rooms like this that some of the first effects of the Minnesota tobacco trial will be evident, as news ripples from the courtroom through the markets to the portfolios of individual investors, mutual funds, and pension funds that own tobacco stocks. Wall Street will be paying very close attention to the trial.

Cogan: The Minnesota case going forward is the single most important event that will happen, at least in the first half of this year.

Doug Cogan tracks the debate surrounding the cigarette industry and investments in tobacco companies as director of the Tobacco Information Service of the Investor Responsibility Research Center. It's a non-partisan, non-profit research group funded by institutional investors, including Minnesota's state pension funds. Tobacco companies are some of the largest firms traded on Wall Street, and Cogan says their stock can be found in pension and mutual funds in which millions of Americans have a personal stake.

Cogan: I think it's fair to say that there are probably 40 or 50 million Americans who in some way do have a financial tie to the tobacco industry, even though they may not realize it.

Cogan's organization studied the investments of some 8,000 mutual funds, and found nearly 20 percent owned tobacco securities.

Cogan: And these tended to be the larger mutual funds, with broadly diversified portfolios, and a large number of mutual fund investors that had the tobacco investments.

Cogan says in most cases tobacco represents a small portion of a large mutual or pension fund's portfolio, one or two percent. But in some cases it's quite a bit larger.

In 1993, Minnesota's State Board of Investment, which oversees the pension fund for state and other public employees, dropped its ban on tobacco investments, and now owns roughly $336 million of tobacco stock ... primarily RJR Nabisco and Philip Morris. Tobacco stocks represent a small portion of the total state pension portfolio, about one percent. However, the tobacco holdings amount to roughly $900 for each participant in the pension plans. Secretary of State Joan Growe - a member of the state board of investment - points out the money for those tobacco stocks came from Minnesota taxpayers, at least indirectly.

Growe: Either through paying the salaries of state employees like myself, who contribute to the retirement fund, or through matching funds that the state puts into that retirement fund to provide for its employees. It all comes from taxpayer pockets. I don't care how you look at it, or what unit of government spends it, ultimately, the money that we have here comes from taxpayer pockets.

For decades tobacco stocks were excellent investments. According to a study by the Investor Responsibility Research Center, over the last 40 years, the value of an investment in tobacco stocks would have grown nine times richer than an investment in the S&P 500 stock index. It's enough to make even a professionally non-partisan researcher like Doug Cogan fairly gush.

Cogan: It's a pretty phenomenal performance figure!

While many on Wall Street remain bullish about tobacco stocks, Cogan says their performance in the last few years has not been stellar. That has provided the economic rationale for a number of states to divest part or all of their pension fund tobacco holdings.

Maryland, Florida, Vermont, and Massachusetts have decided to sell, despite the industry's long-term track record of making money for investors. The rationale is once-predictable tobacco stocks are becoming riskier, in part because of lawsuits like Minnesota's. Jason Huntley, an advisor to the state of Florida, made the case for selling. He argues Philip Morris stock has yo-yoed in a range from $37 to $47 since last March, resulting in added risk of losses.

Huntley: Why would you buy a stock that has those types of characteristics of low return with a lot of volatility swing? Why would you invest in that? You could have made more money in a CD over the last nine months or in a savings account, for that matter, than you would have owning Philip Morris stock.

Others argue a company like Philip Morris looks like a good deal because its stock price is relatively low, given its profit levels.

While the debate over the merits of investing in tobacco stocks continues, observers tend to agree that the Minnesota tobacco trial will fuel the volatility of tobacco stocks. If the state is able to present damaging industry documents, stock prices could plummet. Joe Lieber is an analyst with HSBC Washington Analysis.

Lieber : Trust me, every analyst that follows tobacco on Wall Street will keep tuned to their news machines, if you will, their "Bloombergs," and try to be attuned to what is going on with the day-to-day actions of the trial, because any very negative rulings by the court will a negative impact on the stock prices.

Researcher Doug Cogan says Wall Street is less concerned about the Minnesota case than how it affects the prospects for a national tobacco settlement. He says all eyes are on Congress, but he doubts lawmakers will decide the question before summer. In the meantime, documents that emerge in the Minnesota case may add to the political pressures against a national settlement.

Cogan : It's unusual where one case can have such an effect on a whole industry, but this is really one of those instances. If there is a settlement of the Minnesota case, I think it will bolster tobacco stock prices. It will be an indication that the industry is able to put these problems behind it and look forward to a future where the tobacco litigation cloud has been lifted.

On the other hand, Cogan says a tobacco-industry loss would weigh down tobacco stocks even more because it sends two messages: a national settlement is less likely, and more and more industry profits will be diverted to paying damages.

The Tobacco Information Service: http://www.irrc.org/profile/tis/newsdir.htm .

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