The Mystery Purchase

An “A” stock transaction in 1933, involving the RJR pension plan, is still a mystery.  RJR had always used a pay-as-you-go pension system, meaning that pensions were paid from current profits, and thus were at risk. Should the company falter, there would be no pensions. Reynolds wanted to assure employees that it could meet its retirement promises if the company fell on hard times.  RJR created a “funded” pension plan in 1929, but it was allocated no money.

The pension plan was funded in 1933 with 200,000 shares of  “A” stock, 20% of the total outstanding. Having this stock in the pension fund furthered R. J.s’ desire for the company to be owned internally.  The pension fund would collect the generous dividend and the assets of the fund would grow.  But the treasury’s purchase of 20% of the outstanding shares of this wonderful high yield stock raises a question – How did management persuade owners to sell the stock?

In her official RJR history, Nan Tilly sheds little light on this. She mentions only that financing the pension fund “involved the use of stock the company previously had bought in blocks for resale to the employees.“  These “resale” blocks totaled about 100,000 shares and funded the pension plan. In addition, the plan then bought another 100,000 shares. Stockholder records show that 78,000 shares came from non-participants, outsiders.  The balance , 122,000 shares was purchased from participating shareholders.

Strangely, it was the directors who supplied nearly all these 122,000 employee shares.  The rank and file employees sold very few shares.  Did these people have a more positive outlook or better information on RJR’s prospects than the insiders, the directors? Not likely.

There is no record of which members of management sold their shares or why. Who would sell a stock with such a great history of cash returns? Perhaps the outside owners saw the stock like any other stock, since they couldn’t participate in the bonus, and were thus inclined to sell.  But this rationale doesn’t apply to the directors who sold, giving up a great bonus each year.

Zack Smith, a cousin of Katharine Smith Reynolds, was an RJR assistant treasurer during the 1970s and 80s.  He told a story that might explain the 100,000 share transaction that Nan Tilley vaguely described. Two, and perhaps more, of the directors were caught in the stock market mania that ended with the Great Crash in October 1929.  They borrowed heavily and speculated; when the market crashed, they found themselves insolvent.

This story is not totally surprising.  Just before the crash, a speculator could buy stocks “on margin,” putting up only 10% of the price and borrowing the other 90%.  A stock only had to drop 10%, and the owner would be wiped out, the debt greater than the value of the stock securing that debt.  Will Reynolds knew that the publicity would be unfavorable if people learned about the financial difficulties of the officers. The company had excess cash, and so it bought the stock from these officers to give them liquidity.

Such market disasters were not uncommon in 1933.  Many former titans of industry and finance went broke trading the market.  The large block of stock that did change hands in 1933 certainly gives Zack’s story credibility, although we will never know whether it was true. The lesson we might take from this is that these tobacco men, who were skillful at running their own business, were no more successful than anyone else in market speculation, and it cost them dearly if they were forced to surrender the one stock that would have been better for them than any other.