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TheStreet Open House

CalPERS Applauds CVS Caremark's Tobacco Exit

Stocks in this article: CVS

CalPERS' support of CVS decision did not cite any economic reasons and characterized its statement in the vein of what is important to the fund's constituents.

The fund, however, has a long tradition on putting its money behind social issues that also have an economic element. When divesting tobacco stocks in 2000, CalPERS cited the risk of prolonged litigation to its investment. The fund held over $500 million worth of tobacco stocks at the time.

In 2011, CalPERS said it would divest its holding of companies doing business in Iran and Sudan, causing the fund to sell shares in eight firms worth a total of $160 million. The fund and the California State Teachers Retirement System (CalSTRS) have also recently been pressed by students and California state employees to divest their holding of fossil fuel companies.

CalSTRS, another CVS shareholder, declined on Wednesday to discuss the company's decision to end tobacco sales. However, the fund eliminated new investments in tobacco in 2000 and divested its portfolio of all tobacco in 2009 on the basis of its negative impact on human health and how the nature of that impact affects the industry's long-term profitability.

That investment decision was characterized as part of the fund's fiduciary duty to its members.

Fiduciary Duty and Public Policy

In coming weeks and months, will be interesting to see whether CVS's cessation of tobacco sales will be seen as a compelling fiduciary decision or not. It may also prove yet another example of the tension between short-term and long-term shareholder interests.

If investors were unimpressed by the move, analysts covering CVS's stock appear to believe it could benefit the company in coming years.

"While we expect this change might be a near-term headwind, we believe it will help CVS differentiate itself from other large retail pharmacies and it may be an incremental benefit to the PBM's selling season," Leerink Swann analyst David Larsen  said in a Wednesday client note.

Bank of America Merrill Lynch called the tobacco decision a "smart strategy" and noted that tobacco sales were not important to the company's profitability. "We believe the clipped contribution pales in comparison to likely political and social gains to be had with a widespread media focus [on Wednesday]."

"Stopping the sale of cigarettes and tobacco will make a significant difference in reducing the chronic illnesses associated with tobacco use," Troyen A. Brennan, CVS Caremark Chief Medical Officer, said on Wednesday

The company also said its decision to stop selling tobacco products reflected positions taken by the American Medical Association, American Heart Association, American Cancer Society, American Lung Association and American Pharmacists Association.

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