Inflation-Adjusted Returns
Purchasing power of the dollar has eroded steadily since 1949. For example, a dollar in 1988 would only buy what $.20 would buy in 1949. On average, stocks give a return of 6% over inflation. Against this yardstick, RJR did reasonably well.
The term “Real” dollars means money invested and returns expressed in the purchasing power those dollars have today. For example, $1,000 in 1949 would buy as much a $8,429 would buy in 2019. This highlights two important points:
It gives a clearer picture of how much money RJR had in current purchasing power over the years. If we look only at the dollars invested in 1949, for example, we do not readily grasp how much “real” money this was. Investments must earn an amount greater than the inflation rate if the investor is to realize any “real” benefit.
The ”nominal” return is the reported number year-by-year with no adjustment for inflation. This number can give a false sense that wealth is increasing at a much greater rate than its actual buying power.
RJR invested $25 billion over the years, ($67.6 billion-2020). The investment earned $38 billion ($89.8 billion-2020), a “real” return of 10.1%. Inflation added another 4.8% to the return that did not increase purchasing power (wealth).
But the contrast between RJR Tobacco (Domestic) and everything else stands out. Tobacco gave a stellar real return of 15.0% while all the other business not only lost $1 billion in “nominal” dollars, but even more in “real” purchasing power, $9 billion. Overall, the RJR investments provided a real return of 10.1 %, well above the total stock market that gave shareholders a 6% real return over the thirty-nine years. Vastly superior returns from the cigarette business more than offset the “drag” from the diversification program 15.0% versus -9.4%.