Au Contraire, Mr. Smith: Businesses One Might Call “Immoral” Often Thrive
Greg Smith’s takedown of Goldman Sachs (GS) last week for morally delinquent business practices provided a nice show of conscience in a world where principles are too seldom examined. But for investors, it was also a reminder of an uncomfortable truth: products and business practices one can’t be proud of often pay quite well.
Porn Purveyor FriendFinder Networks (FFN), which also promotes marital infidelity, has given investors some of the biggest gains on Wall Street this year. Altria Group (MO), parent of the Marlboro Man and the cigarettes that killed him, is up about 45% in the past two years.
YUM Brands (YUM) makes investors happy by selling the most unhealthy kind of junk food at its Taco Bell, KFC and Pizza Hut outlets. Products like its chicken pot pie (37 grams of saturated fat; 790 calories) and Volcano Nachos (61 saturated fat grams; 990 calories) share blame for a nationwide epidemic of obesity and the laundry list of costly, painful and deadly medical conditions that come with it. But investors are much happier with YUM than PepsiCo (PEP), the snack food company that had been trying to make its products healthier.
The discrepancy wasn’t lost on the folks at Pepsi, who this year are talking less about yogurts and more about their wonderful Doritos. Pepsi is now a key player in Taco Bell’s latest great product – a Dorito Taco.
Brazilian miner Vale (VALE) is a strong company offering a lovely dividend yield now of about 4.4%. Based on the numbers, YCharts Pro gives the company strong marks for fundamentals and a perfect score for share price value. Not reflected in the numbers: Vale is building a huge dam to flood about 40,000 acres of Amazonian rainforest.
Layoffs represent a much more common way investors gain from unsettling business strategies. Cutting the workforce tends to be good for shareholders, not-so-good for customers who depend on service and product quality, and life-changing-ly horrible for employees in today’s job market. Last year, Merck (MRK), Pfizer (PFE) and Lockheed Martin (LMT) announced plans to dump between 5,500 and 13,000 jobs each. YCharts Pro charts give each of these companies excellent marks for fundamentals and share price value. With modest share price gains and dividend yields all above 4% at the moment, investors are not exactly sharing the pain.
Greg Smith contends that morally bankrupt companies cannot survive. That’s simply not true. It is not at all uncommon for shareholders to get more money when the companies they own do things that won’t likely make anyone proud.
Like it or not, an investor gives his blessing to a company’s strategies, tactics and products every time he buys or holds its shares. So it would be nice if a solid balance sheet and climbing returns could guarantee him a clear conscience. They don’t. The investor has to use his own moral compass to judge whether he’s promoting honorable business or shameless behavior. And when he finds that the work he’s supporting doesn’t align with whatever he believes is right, what do you think is the right thing to do? There is room for comments below.