I always like to see what Dan Ferris is recommending for subscribers of his Extreme Value newsletter, in part because I’m personally invested in a few of his picks that have done well (Altius Minerals and Sprott Resource), and in part because I’m generally sympathetic to the notion that long-term “value” investing is the best way for individual investors to build wealth.
And of course, his ads are full of colorful hype, outrageous promise, and simple ideas masterfully concealed … and I just eat that stuff up.
This latest one is about a “secret” that Jean Warren, who signs the letter as a researcher for Extreme Value found in a Maryland public library (Ferris writes his newsletter from Oregon, but his publisher and, apparently, his researcher, are in Baltimore).
And of course, it doesn’t matter that you don’t happen to live in Baltimore (though you might, for all I know), because the ad says that …
“A secret in your local library could help make you rich, no matter where you live.”
Makes you feel a bit like Nancy Drew, no? The Secret in the Local Library …. cue spooky music.
But of course, Nancy was solving mysteries and riddles, not trying to make you a bazillionaire. So what’s this “secret” all about?
“Head straight for the ‘M’ folder
“ The key to this secret lies in a government document from 1998… You can find it in most library archives, filed under “M”.
“The document was signed by the Attorneys General of almost all the states… and contains details of billions of dollars in cash they receive each year, which is earmarked for the benefit of Americans like you and me. I’ll tell you where the cash comes from in a moment. (It’s not the federal government.)
“The amount of money the states have received, thanks largely to this secret, has increased every year from 2000 to 2009…..
“Even better, they’re set to get an estimated $25.1 billion this year… and they could see as much as $27 billion in 2011. Incredibly, the government document stipulates that much of this cash must be made available for the benefit of state residents every year until at least 2025… and probably beyond. ”
So why are the states getting this money? And where is it coming from? And how could this possibly be to your benefit? Let’s hear a bit more of the teasing …
“ You see, this situtation [sic] involves 49 states, which have what’s known as a Balanced Budget Requirement… meaning many cannot run a deficit from year to year. So for decades, local governments have struggled to close the budget gap.
“Today, they are even more desperate for cash….
“That’s why the Attorneys General of all 50 states did an incredibly smart thing in 1998, which has been a saving grace for many states… and which could help make you a small fortune over the next few years… In short, the states decided to strike deals with some of the most profitable companies in America, whose names can be found in the government document at your library. Today, there are roughly a dozen publicly traded companies reaping the benefits of these deals…
“You see, in exchange for paying a large chunk of their profits directly to state governments, these companies in turn solidified their future profitability.
“ The state governments have virtually eliminated all competition… and have all but guaranteed that these dozen firms will continue to reap incredible profits for at least the next 15 years. “
Huh, OK … so that’s enough to tell you what the basic premise of the ad is — what’s being hinted about here is the Master Settlement Agreement (MSA) between the Attorneys General of all (I think) the states, and the big tobacco companies. It was signed in 1998, at which time it was certainly headline news and got a lot of attention, but in the past decade it has largely faded into the back pages of the paper — we still hear about it now and then when a watchdog group reminds us of how little of the settlement money is going to smoking cessation or public health programs, or, as last year, when the payouts drop and the state governments have to come up with money elsewhere.
And if you want to actually read the MSA — you don’t have to slip into your cloak, hide your dagger, and slink into the back of the stacks at your local library, you can just check it out here if you like.
Despite some occasional (and relatively minor) “hiccup” years it is still a big fund, with growing payouts most years (they have a pretty aggressive inflation escalator built into the payouts) — and while that $25 billion figure for this year is generally accurate (at least, it matches estimates I’ve seen), it includes the state tobacco taxes as well as the tobacco trust fund payments from the MSA (the settlement funds in recent years have averaged about $8 billion/year, the rest is from state tobacco taxes).
And the “eliminated all competition” stuff makes sense — after all, a major aspect of the settlement agreement was a dramatic curtailment of the amount of cigarette advertising … and I think we can intuit, even without knowing the details for the industry, that if you sell an addictive product and no one is able to enter the niche by making a big marketing push, the biggest players are likely to maintain their stranglehold on the market. We may not ever see another major cigarette brand built in the United States, and almost certainly won’t see a brand built to frighten the likes of Marlboro, Camel and Newport.
Of course, in exchange for those marketing shackles they face a dwindling user base in the US — not just because their product is killing their customers, albeit slowly, but because they’re not able to market to new potential smokers nearly as effectively, and smoking cessation campaigns and dramatically escalating cigarette prices have helped to cut smoking by about a fifth since the settlement was signed in 1998.
I’ve noted in the past that I’m not personally willing to invest directly in tobacco companies, and I’ve even eschewed a few high-dividend “blue chip” ETFs that I otherwise generally like because they’re largely invested in tobacco stocks (I won’t fool myself — I certainly have some exposure to these stocks via broader index ETFs, and probably in some of the actively managed mutual funds I own, I’m mildly conscientious on this front but certainly not rabidly devoted to removing all tobacco exposure from my portfolio, and I generally don’t like socially conscious mutual funds very much).
But that doesn’t mean I shouldn’t continue this peek into the depths of the teaser and see what Ferris and his folks are recommending — just because I won’t buy it doesn’t mean you shouldn’t, right?
So we see the logic — any industry that is enabling $25 billion+ payouts to the states every year must be a very solid cash-generator (that doesn’t even include the Federal cigarette tax, which was hiked last year and is also large), and we hear some more about the actual companies.
“… the government has become a financial stakeholder in the industry, and is all but guaranteeing these companies’ profits.
“Since 1998 when the original deals were made, stocks in this industry have performed outrageously well…
“One stock has gone up 731%… and is paying an incredible 8.4% dividend – more than 4 times the S&P 500 average yield.
Another has returned a whopping 1,360%… and is rewarding shareholders with a bumper dividend, up nearly 20% since last year.
“And a third stock has returned 375%… and in addition, paid out a whopping 398% in dividends since 1999.
A small stake of $5,000 in each of these companies would be worth $148,200 today! ”
So underneath all this blather, it does appear that they’re recommending at least one individual tobacco stock …
“There’s one stock among the ‘privileged dozen’ that has likely made more people rich than any other company in history, and I can almost guarantee that you will never guess what it is.”
That “privileged dozen” is the group of tobacco and cigarette companies, though of course they never come out and say that they’re talking about cigarette makers. Oh yeah … and we can so guess.
They don’t provide much more in the way of details about the businesses — that, of course, would make it too easy to sniff out the names for yourself … but they do tell us some more about the performance of the stocks:
“For instance, one company has grown its dividend by 1,640% since 1986… another has increased its dividend 132% since 1999… and a third company has withstood 3 recessions, growing its dividend 365% since 1988…
“ But here’s the amazing thing…
“ The best performing stock in the history of the stock market has raised its dividend 43 consecutive times – increasing a whopping 13,361%.
“ If the dividend continues to increase at the same rate it has in the past, you could triple your money in 10 years by reinvesting those dividends, even if the share price doesn’t budge a single percent.
“ Of course, all investments carry some risk.
“ But remember, this company is ‘in bed’ with 49 state governments.
“As Business Week reports: ‘It’s a pretty great combination to get the highest yields out there that are also some of the safest.’
You see, this stock is almost immune to market turmoil because the product it sells is considered indispensable by its fiercely loyal consumers….
“ And even now, while we’re still in the grips of the worst recession since the Great Depression, shareholders of this stock have seen 69% gains in the last 18 months.
“ In fact, I believe a small, $5,000 investment could easily balloon into $17,500, in just a few short years…
In short, if you buy shares of this amazing company today, the potential for incredible income and great capital gains in the coming years is unmatched, no matter what happens in the rest of the economy.”
So it appears pretty certain to me that the core investment they’re teasing here is the same stock that Jeremy Siegel identified a few years ago as, yes, the single best performing stock in the history of the stock market (or at least, in the history of the S&P 500 — about 50 years): Altria (MO)
You can see the table from Siegel’s book (Stocks for the Long Run) here — it’s worth noting that of the top 20 performing stocks from the original S&P 500 for that period from 1957-2006, at least half of them are companies that are either cigarette makers also (Lorillard, British American), or got wrapped into Altria at one point (Nabisco, Kraft). Altria’s annualized return for those 50 years was truly stupendous, very nearly 20%.
The main argument from Siegel’s book was that the big winners for that long time period were the steady dividend payers — firms like Altria that have always generated prodigious free cash, and usually distributed a lot of that cash to shareholders, were the ones that could dramatically outperform for investors, largely because of the compounding power of those dividends even during down times for the stock market. That’s what led to the building of the new dividend-weighted and similarly rejiggered indices — Siegel’s discoveries tell us that we should be investing in the big, profitable dividend payers, so why not weight your index fund based not on the market cap of the company, but on the size of their cash payouts to investors? (Siegel is an advisor to WisdomTree, the most prominent of the “fundamentally indexed” ETF firms).
It’s still awfully early to make a judgement call on those ETFs and indices, though I generally like the idea, but certainly many of the remaining tobacco stocks are still on those high-dividend lists — including Altria (MO), Philip Morris International (PM), Lorillard (LO), and Reynolds American (RAI), all of which have well-above-average dividend yields (even Philip Morris International, by far the largest of these companies but the stock with the “growth” tag because of the international reach of the Marlboro Man and lower regulatory overhang, yields over 4% … most of the others are near or above 6%).
So I’d wager that the Extreme Value special research report that they call “Retire Rich With the Best Performing Stock of All Time” is likely recommending the tremendous compounding power of Altria (MO), though it’s possible that he might prefer Philip Morris International (PM), since that, as MO’s biggest spinoff, also could qualify as the “best performing stock of the last 50 years.”
Will the growth continue? Well, I probably personally have a blind spot about tobacco companies, and would have said five years ago that I thought they were probably declining firms who would just run out the string on their depleting assets (that is, their customer base), but I clearly would have been wrong about the potential. Smoking has contracted markedly in the US and has slowly been squeezed out of most public areas, but selling cigarettes is still an incredibly profitable business, and there appears still to be plenty of growth potential overseas for the global brands.
So there you have it — not surprising that a value guy would be touting any of the tobacco firms at this point, since they’re all trading at reasonable valuations measured by cash flow or earnings (though aside from plants and brands they’re “asset light” and trade at large multiples of reported book value), and they all have nice yields, so perhaps worth a moment of your time even though I’m not personally interested.
And incidentally, the new ad for Ferris’ letter continues to also tout those two stocks I noted at the top (and own), Altius Minerals (which they’re now naming in at least some ads, not just teasing), and Sprott Resource, which controls the One Earth Farms startup (he doesn’t name this one, that’s still a “tease”, but the ad notes that Ferris does “the grunt work” and gets dirty in search of a stock, including his trip to Lethbridge, Alberta, to see the “massive tract of land” being seeded by One Earth). I’ve written about both of these several times for the Irregulars, but if you want more info I think the most recent notes here on the free site were my look at “Newfoundland’s Golden Mountain” last year (that’s Altius) and the “second largest farm in the country” article back in June (Sprott, as you no doubt already guessed).
And for what it’s worth, I wrote about Altria fairly recently, too — it was teased as the “world’s greatest dividend stock” by Bill Spetrino during a big push for his Dividend Machine newsletter back in May.
Full disclosure: as noted above, I own shares of Sprott Resource and Altius Minerals. I am not directly invested in any other company mentioned, and will not trade in any stock mentioned for at least three days.