The full corporate story of Philip Morris is complex, but the outstanding performance of its stock makes its history worth retelling. Because of its acquisitions, Philip Morris winds up with the primary holdings of ten separate companies from the original S&P
500. Remarkably, all ten of these original S&P 500 companies outperformed the market.
Throughout the postwar period there were two prominent U.S. tobacco manufacturers, Philip Morris and R.J. Reynolds Tobacco. Philip Morris not only made Marlboro, the world’s most successful brand, but also Parliament, Merit, Virginia Slims, and L&M (the agship brand of Liggett and Myers, which Philip Morris bought in 1999).
Reynolds Tobacco made Camel, Winston, Doral, and Salem, four of the top ten leading brands.
As smoking declined and the threat of legal actions against cigarette manufacturers increased, both rms used their plentiful cash to acquire other rms, particularly in the food industry. In 1985, Philip Morris purchased General Foods, and R.J. Reynolds Tobacco bought Nabisco Brands, forming RJR Nabisco.2 Nabisco Brands, through previous mergers and acquisitions, absorbed two other original S&P 500 rms, including Cream of Wheat in 1971 and Standard Brands in 1981. Reynolds also had purchased Penick & Ford in 1965, as well as Del Monte Foods in 1979, which had earlier purchased California packing in 1978. All six companies in the RJR lineage, including RJR itself, beat the market by more than 2 percent a year, and the top two, California Packing and Standard Brands, outperformed the S&P by over 5 percent a year.
In 1988 Philip Morris purchased Kraft for $13.5 billion. The following year RJR Nabisco was taken private by Kohlberg Kravis Roberts (KKR) in the largest leveraged buyout in history. KKR paid $29 billion for RJR Nabisco, and three years later, in 1991, sold a portion of the firm to the public in the form of RJR Nabisco Holdings.3, 4
FIGURE A1: CORPORATE EVOLUTION OF PHILIP MORRIS FROM 1957
RJR Nabisco Holdings spun o its ownership of Reynolds Tobacco to shareholders in 1999, but due to the fact that RJR was a much smaller share of Nabisco Holdings than Nabisco, shareholders still had a majority of their investment in Nabisco Holdings.
Nabisco Holdings was then bought by Philip Morris in 2001.
After this purchase, Philip Morris combined General Foods, Kraft, and Nabisco Holdings into one company called Kraft. Sixteen percent of Kraft was sold from Philip Morris in an IPO in 2001 (proceeds were over $8 billion).
From the direct Philip Morris lineage, General Foods became the seventh best- performing rm of the original S&P 500 rms, giving shareholders a return of 16.85 percent per year, 6 percent better than the S&P 500. Kraft Foods, whose original parent was National Dairy Products, is the same company I cited in Chapter 1 as having the best return among the largest fty rms in 1950. National Dairy came up number eighteen on the list of the best original S&P 500 companies.
As a result, Philip Morris is the legacy rm for ten original S&P 500 rms: the six from the RJR lineage, General Foods, Kraft, Thatcher Glass, and Philip Morris itself. All ten of these companies ended up beating the S&P 500 Index, and four are among the twenty top-performing original stocks.
The Performance of the Twenty Largest Firms in 1957
Most of the companies that reached the top twenty (Table 3.1 in Chapter 3 and Table A2) started out quite small. None of the top-twenty performing stocks from the Total Descendants portfolio ranked larger than sixty- fth in market capitalization in 1957.
Since the S&P 500 index is, like most averages, capitalization-weighted, it is important to learn how large stocks performed.
The answer, as Table A2 shows, is “very well.” The return to an equally weighted portfolio of the twenty largest companies, which constituted 47 percent of the market value of the S&P 500 in 1957, generated an 11.40 percent return for investors, identical to the performance of the Total Descendants portfolio and considerably above the return on the S&P 500 Index.
The Dominance of Oil
Nine of the twenty largest rms in 1957 were in the energy sector, which was the second largest sector after basic manufacturing (materials). It is surprising that despite the rapid shrinkage of the oil sector, the top ve of the best-performing stocks from these twenty largest firms were all from the petroleum industry.
Number one was Royal Dutch Petroleum, a rm founded in the Netherlands, and one of the companies that Standard & Poor’s deleted from its index in 2002 when it purged all foreign-based rms. The second best-performing rm was Shell Oil, a U.S.-based company that was purchased by Royal Dutch in 1985. Royal Dutch gave shareholders a handsome 13.6 percent annual return over the next forty-seven years, and Shell returned 13.1 percent, both far better than the S&P 500 Index.
Shell and Royal Dutch share a long history that extends back to 1892. Shell Transport
& Trading, a London-based rm, built the world’s rst oil tanker, which on its maiden voyage delivered 4,000 tons of Russian kerosene to Singapore and Bangkok.
At the time, Royal Dutch was developing oil elds in Asia and commissioned an oil eet of its own. In 1903, facing competition from the Standard Oil trust and John D.
Rockefeller, the two European companies decided it would be better to merge their operations. While both Royal Dutch and Shell Transport remained independent companies, in 1907 the two companies formed the Royal Dutch Shell Group, with Royal Dutch owning 60 percent of the firm and Shell owning 40 percent.
The original oil companies that ranked third, fourth, and fth were Socony Mobil (which rst dropped the Socony [Standard Oil Co. of NY] name and later merged with Exxon), Standard Oil of Indiana (which merged into BP Amoco), and Standard Oil of New Jersey, which changed its name to Exxon in 1972. Each of these firms outperformed the S&P 500 Index by between 2 and 3 percent per year over the next forty-six years.
Gulf Oil, Standard Oil of California, and Texas Co. (Texaco) eventually merged to form ChevronTexaco, and both outperformed the S&P 500 Index, while Phillips Petroleum, which became part of ConocoPhillips, slightly underperformed the Index.
Of the remaining eleven rms in the top 20, the basic materials and manufacturing stocks, such as Union Carbide (now part of Dow Chemical), DuPont, General Motors, and Alcoa, lagged the market signi cantly. U.S. Steel would have given investors an even worse return had it not purchased and transformed itself into Marathon Oil.
Bethlehem Steel, once the second largest steel manufacturer in the world behind U.S.
Steel, went bankrupt in 2001 and is the only one of the original twenty largest S&P 500 stocks to lose money for investors.
It might be tempting to suggest that the outperformance of the original S&P portfolios is related to the superior returns in the oil sector, which constituted almost one-quarter of the original index. But that is not the case. Even when all rms from the oil sector are removed, all the S&P 500 portfolios of original stocks would still have outperformed the S&P 500 Index.
TABLE A2: RETURNS OF THE TWENTY LARGEST COMPANIES FROM THE ORIGINAL S&P 500
THE RETURNS OF THE ORIGINAL S&P 500 FIRMS
Included in this list are the name changes, the mergers, and the year that they occurred.
It is assumed that $1.00 is invested in each of the rms and that all dividends are reinvested and all spin-o s, if any, are held. If a rm goes private, the funds from privatization are assumed to be invested in the S&P 500 Index fund, with dividends reinvested. If the privatized rm goes public again, the total accumulated in the index fund is used to purchase the newly issued rm. These rms comprise the Total Descendants portfolio, as described in Chapter 2.
This list displays the breakdown of the accumulation of each dollar between the parent and spin-o s, and the percentage allocated to each. Included is the rank by market capitalization of each firm on February 28, 1957.