If you’re an analyst in a big trading firm you know that ,say, an oil company exists and is currently valued at a certain level by the market taking into account the available information about it’s business and profits.
Later that company is targeted by divestment activists.
A big university is pressured by economically illiterate students into selling all it’s stock in the oil company.
The analyst’s note this and know that the company is probably being slightly undervalued as a result and buy up some stock.
There are actually Sin Funds that target stock of companies like tobacco, fossil fuel companies etc and invest in them on the basis that they’re likely slightly undervalued due to other “moral” investors avoiding them.
Thus the only effect of divestment is to transfer a moderate amount of money from yourself to people who are slightly less ethical. It doesn’t hurt the company at all.
There are actually Sin Funds that target stock of companies like tobacco, fossil fuel companies etc and invest in them on the basis that they’re likely slightly undervalued due to other “moral” investors avoiding them.
If they continue to be consistently undervalued because of that mechanism, then a Sin Fund should see no gain in growth as a result of it. What the Sin Fund needs is for morals to shift in the direction of those firms, or for investors to start caring less about morals.
My guess (which is no more than a guess) is that the reverse is likely to happen with tobacco (as smoking declines) and fossil fuels (as other sources of energy get lots of support and start taking away market share from fossil fuels), but other varieties of “sin” might go the other way (e.g., I think pornography is much less disapproved-of than 20 years ago and I would expect that trend to continue). But my guess is also that these things are pretty well priced in already.
You seem to be implicitly assuming that the only value of a stock is it’s potential future increase in price, for most their dividends and stability are largely what set their value. Unless the divestment activists control a really really massive fraction of the market then that’s not going to matter in any way shape or form.
Losing actual customers as with tobacco and fossil fuels absolutely can hurt a company. Losing sales hurts, it’s only divestment that’s irrelevant.
I don’t think I’m assuming what you say I seem to be assuming. Could you explain why you think I am?
(I should probably have said “investors and customers” at the end of my second paragraph; I was echoing your reference to “investors” when you wrote about sin funds.)
When you own equity, you can profit in two different ways. One way is to receive some of the cash that the company generates, traditionally in the form of dividends. That’s known as the dividend yield. The other is price appreciation.
These two ways are interlinked, of course, in many ways. Price change depends on the company’s cash flows. A popular nowadays way of distributing cash to shareholders is share buybacks (they are more tax efficient) which work through share price.
To get back to the original point, many “sin” companies (e.g. tobacco) pay dividends. If the price at which you can buy the stock is “cheap” (= “consistently undervalued”), your dividend yield is higher even without any price appreciation.
Let’s take a stylized example. Company XYZ’s shares are traded at $100 and the company pays $5/year dividend. The dividend yield is 5%. Now let’s say it has been targeted for divestment and the share price dropped to $50. At this point if you buy the shares you will get the dividend yield of 10% without any need to hope for a price increase.
Some companies (like up until recently Apple) didn’t pay much in the way of dividends but instead pumped money back into company growth to try to increase the value of their shares. I think this may have been the kind of gain gjm was thinking of where you buy hoping the value will increase rather than banking on the company handing out good dividends.
That is a good point. The stock market is probably more competitive than whatever market the company is in, so, for every one moral investor, there are infinite more that are amoral.
Again, that is a good point, and I already had it in mind when I posted my reply. The person I was replying to did not articulate it correctly.
Still, I do not think the original question should be dismissed outright. The fact is that not even the stock market is perfectly competitive. There are not infinite players in either side. For instance, if you look at Islamic countries, you can find countries where close to 100% are religious https://en.wikipedia.org/wiki/Islam_by_country. I can imagine how a religious figure could possibly bankrupt a company by talking to banks alone and draining the company out of capital (without ever talking to customers). My point is that even in highly competitive markets maybe activists can have an influence. I find it very unlikely. I still think dismissing that question outright is anti-scientific.
Sure, if you could coordinate with almost all players in a market and got them to agree to give up financial gain to achieve your goals without any defecting then it would work. Though that’s a mighty big “if” in any large market.
only if they do so in total secrecy.
If you’re an analyst in a big trading firm you know that ,say, an oil company exists and is currently valued at a certain level by the market taking into account the available information about it’s business and profits.
Later that company is targeted by divestment activists. A big university is pressured by economically illiterate students into selling all it’s stock in the oil company.
The analyst’s note this and know that the company is probably being slightly undervalued as a result and buy up some stock.
There are actually Sin Funds that target stock of companies like tobacco, fossil fuel companies etc and invest in them on the basis that they’re likely slightly undervalued due to other “moral” investors avoiding them.
Thus the only effect of divestment is to transfer a moderate amount of money from yourself to people who are slightly less ethical. It doesn’t hurt the company at all.
If they continue to be consistently undervalued because of that mechanism, then a Sin Fund should see no gain in growth as a result of it. What the Sin Fund needs is for morals to shift in the direction of those firms, or for investors to start caring less about morals.
My guess (which is no more than a guess) is that the reverse is likely to happen with tobacco (as smoking declines) and fossil fuels (as other sources of energy get lots of support and start taking away market share from fossil fuels), but other varieties of “sin” might go the other way (e.g., I think pornography is much less disapproved-of than 20 years ago and I would expect that trend to continue). But my guess is also that these things are pretty well priced in already.
You seem to be implicitly assuming that the only value of a stock is it’s potential future increase in price, for most their dividends and stability are largely what set their value. Unless the divestment activists control a really really massive fraction of the market then that’s not going to matter in any way shape or form.
Losing actual customers as with tobacco and fossil fuels absolutely can hurt a company. Losing sales hurts, it’s only divestment that’s irrelevant.
I don’t think I’m assuming what you say I seem to be assuming. Could you explain why you think I am?
(I should probably have said “investors and customers” at the end of my second paragraph; I was echoing your reference to “investors” when you wrote about sin funds.)
When you own equity, you can profit in two different ways. One way is to receive some of the cash that the company generates, traditionally in the form of dividends. That’s known as the dividend yield. The other is price appreciation.
These two ways are interlinked, of course, in many ways. Price change depends on the company’s cash flows. A popular nowadays way of distributing cash to shareholders is share buybacks (they are more tax efficient) which work through share price.
To get back to the original point, many “sin” companies (e.g. tobacco) pay dividends. If the price at which you can buy the stock is “cheap” (= “consistently undervalued”), your dividend yield is higher even without any price appreciation.
Let’s take a stylized example. Company XYZ’s shares are traded at $100 and the company pays $5/year dividend. The dividend yield is 5%. Now let’s say it has been targeted for divestment and the share price dropped to $50. At this point if you buy the shares you will get the dividend yield of 10% without any need to hope for a price increase.
D’oh, of course. My apologies for being dim.
Very clearly put.
Some companies (like up until recently Apple) didn’t pay much in the way of dividends but instead pumped money back into company growth to try to increase the value of their shares. I think this may have been the kind of gain gjm was thinking of where you buy hoping the value will increase rather than banking on the company handing out good dividends.
That is a good point. The stock market is probably more competitive than whatever market the company is in, so, for every one moral investor, there are infinite more that are amoral.
Again, that is a good point, and I already had it in mind when I posted my reply. The person I was replying to did not articulate it correctly.
Still, I do not think the original question should be dismissed outright. The fact is that not even the stock market is perfectly competitive. There are not infinite players in either side. For instance, if you look at Islamic countries, you can find countries where close to 100% are religious https://en.wikipedia.org/wiki/Islam_by_country. I can imagine how a religious figure could possibly bankrupt a company by talking to banks alone and draining the company out of capital (without ever talking to customers). My point is that even in highly competitive markets maybe activists can have an influence. I find it very unlikely. I still think dismissing that question outright is anti-scientific.
Sure, if you could coordinate with almost all players in a market and got them to agree to give up financial gain to achieve your goals without any defecting then it would work. Though that’s a mighty big “if” in any large market.