WP III.10

RJR Disciples

Pauline Carter

Pauline was born in Salem, NC in 1910, three years before the towns Winston and Salem merged. She left school in the seventh grade to work at Reynolds Tobacco, starting at $12.20 a week, paid in $5 bills with odd dollars paid in silver dollars. She was a factory lunchroom worker for most of her career. As the years went by, RJR opened five factory cafeterias and she worked at various locations where she got to know many of the executives.  They recognized that she had “a head for figures”, and in 1964 she helped analyze and transfer the cafeteria operations to a food service company. Pauline then briefly worked in the filter room where machines attached Winston and Salem cigarette filters to the tobacco part of the cigarette, a real engineering feat at that time.

Pauline retired in 1965 with thirty-nine years’ service. She probably never made more than $5,000 a year. But she saved her “dimes and quarters” and when she got enough money, she would buy two or three shares of Reynolds stock. W. A. “Nab” Armfield promoted the local Reynolds stock. Pauline undoubtedly bought the highly sought “A” stock when it was available. Armfield had a small brokerage office on the mezzanine floor of the RJR Tobacco Building. He later merged into Reynolds Securities, now Morgan Stanley nearly a hundred years later.

She was a widow, married late in life with no children. In retirement, her world was simple, revolving around her Methodist church, buying stocks, and working in her yard. She jotted down her purchases in careful script in a black-and-white composition book. She immediately reinvested her dividends. Then came the LBO, and it disturbed her greatly. She felt that she was “losing her company and her stock” – that they were being taken away from her. She depended on the dividend which paid her $20,000 or so each quarter.

I had only a passing acquaintance with Pauline through some of my distant relatives who were her friends. But apparently, she knew of my work at RJR, and shortly after the buyout, Pauline called me. She began by saying “Gene, they are taking my Reynolds.“ From her tone and her comment, one would have thought she meant that her precious stock certificates were being snatched away without compensation. She sounded despondent. Like many others in Winston-Salem who had devoted their lives to R.J. Reynolds Tobacco, she did not look at her shares as an investment – but rather a part of her life that was being torn away. And she didn’t understand why.

I invited her to my office in the old Nissen Building at Fourth and Cherry Streets.  Her visit was almost surreal, one I will never forget. When Pauline arrived, I asked where her stock certificates were, and she said they were in the trunk of her Chevrolet parked on Cherry Street. We went out together, got the stack of certificates, brought them to my office, and put them on a small conference table. There lay exactly 42,500 shares of R. J. Reynolds common stock, over $4.6 million of negotiable instruments. I was stunned and concerned that she was hauling them around in her car. But Pauline was not naïve. She said that she kept the certificates in a safe deposit box in the bank in this very building. She had taken them home to inventory and dared not leave them there. When we finished, we immediately took the certificates downstairs and put them back in her bank deposit box.

We discussed Pauline’s options: she could sell the stock now for better than $100 a share, or she could take her chances on the leveraged buyout offered price which was a few dollars higher, although the $109 offer might fall through since the deal was not yet certain.

She was concerned about her dividend, although she had an RJR pension and Social Security, so she was hardly destitute. I pointed out that at a $100 share price, even after capital gains tax Pauline would receive over $3 million. At the current 8% rate, U.S. Treasury bonds would provide her $4,600 a week. At first, she didn’t grasp the significance. She seemed to think that somehow this represented a return of principal to her. She asked how long she might expect to receive the money before it “ran out“. I told her, on the contrary, $4,600 would be coming in every week and in order to keep it from growing even more, she would need to spend that $4,600 each week. It was humorous because she had never looked at investing in quite that way before.

Pauline sold her shares for about $100. Her cost basis was well below $2 per share, and she paid about $1 million in capital gains tax. She netted $3 million but continued to live modestly. ‘‘I want to be just like I have always been,’’ she told a USA Today reporter. ‘‘Let me tell you, honey, I always drove a Chevrolet, and I’m not going to change.’’ She allowed herself one luxury: wall-to-wall carpet for her modest home. But she continued to shop with coupons. And she made a trip to Dollywood, but she went during the week to avoid higher weekend prices.

The next year she gifted $1.5 million to her church and to family members. Pauline also continued to invest her money wisely – a $1 million thirty-year treasury at a discount (it appreciated 30% to maturity) and blue-chip stocks. Her portfolio more than doubled in the ten years after the LBO.

My associates and I spent a good bit of time with Pauline. Meetings with her were like few others, ever. My associate, Ray Peebles, took her to lunch one day, and she noted that we were a very young firm and could not afford to spend lavishly on ourselves, and certainly not on her. She insisted that they go to the local K&W Cafeteria for lunch. As anyone from Winston-Salem knows, the food is good but basic, and the most extravagant meal couldn’t have cost six dollars. That was Pauline’s style.

She once asked to meet to discuss estate planning. I picked her up at her home for coffee. She chose Biscuitville, a regional coffee and biscuit shop. Pauline had no pretension, and her simplicity was admirable, given her wealth.

As the years passed, Pauline talked about what would happen to her wealth at her passing. We discussed a charitable legacy through the Winston-Salem Foundation. She liked the idea, and we worked with attorney Cowles Liipfert on a will. At her death in 2000, she bequeathed her estate of over $3 million to the Winston-Salem Foundation, and her church, having already given generously to family members.

Not only was Pauline a good investor, she was crafty and cautious in handling her finances. She had led both her nephew Charlie and me to believe that we knew about all her assets. But as it turned out, she secreted away some extra financial security. After she died, Charlie was cleaning out her home and he discovered a box in her closet that contained $500,000 in U.S. savings bonds

Charlie has played an active role in choosing the charities that receive about $150,000 each year from the Carter Foundation, with a focus on charities that benefit needy children. In its first nineteen years, her foundation has given away $2.8 million, and the corpus of the trust is slightly larger than its beginning value.

Describing Pauline, Charlie said, “Her main thing in life was to save a dollar when she could. She always encouraged the family to save, save, save and to always watch their spending. I don’t believe she had any concept of how much money she really had, although she had the figures right there in front of her.”

The new Winston-Salem Foundation headquarters has a Pauline Carter Conference Room in her honor. She was an example of the work ethic and spirit that allow even people of modest means to become the “millionaire next door.” Through Pauline and her trustees, I have seen the joy and the good that come from being generous.

“Money doesn’t make you happy. It makes you unhappy in a better part of town.”

Pauline knew that she could find happiness in the same part of town where she had always lived, and money had nothing to do with it.

Cousin Mary

Cousin Mary did not own “A” stock, but her attachment to her Reynolds stock exemplified the faith that Winston-Salem people had in RJR. Her husband died shortly after the peak of RJR stock’s market valuation in 1962. She had an emotional attachment to the stock that was not unusual, even if somewhat extreme.

She was disappointed that Wachovia Bank, her financial advisor, told her that she needed to diversify her RJR holdings, and they sold part of it. I pointed out that diversifying was the right thing to do, that she could even repurchase the stock at a lower price than it was sold. Her response was, “But it wouldn’t be the same stock certificate.”

I constantly remind people that your stock certificate does not know you own it; it does not love you, and it does not care whether you sell it or keep it. But to RJR shareholders, faith in that piece of paper was a religion.