THE R. J. REYNOLDS FAMILY – CHAPTER 3 RJR “A” – THE ‘ANTICIPATION’ STOCK

RJR disliked answering to the American Tobacco Trust’s “New York Crowd.” He wanted North Carolinians—especially his employees—to own Reynolds Tobacco, so he devised an innovative plan.

He recapitalized the company with 100,000 shares of common stock and introduced Bylaw XII, a unique provision in the corporate charter. Under this bylaw, any stock owned by a Reynolds Tobacco employee was classified as “A” stock. It entitled holders to an extra dividend based on a profit-sharing formula. Using 1910 profits as a baseline, the company allocated 10% of annual profits exceeding this base to employees. This stock functioned like common stock but included a built-in profit-sharing component, similar to a modern 401(k).

While the “New York Crowd” retained some influence, RJR secured support from Buck Duke—perhaps because Duke’s associates were excluded from Reynolds’ management or because he underestimated the potential of a company with only one national product, Prince Albert Smoking Tobacco. If this were the case, then Duke underestimated RJR’s determination.

“A” stock sold for $242 (C$7,800) on the open market, out of reach for most employees. To make it accessible, RJR allowed workers to purchase shares with a $100 deposit, financing the remaining $142 at 6% interest. Employees who couldn’t afford the deposit could pool resources—ten workers contributing $10 each to buy a single share. The rich dividends would repay the loan within six years.

In 1912, employees purchased only 664 shares, but over time, they recognized the stock’s value. By 1948, they collectively owned 39.7% of the company. However, due to IRS pressure, all “A” shares were converted to 1.25 common shares in 1949.

Most employees didn’t initially understand the term “participation” but referred to their investment as “anticipation” stock because they eagerly awaited the dividend payouts. One local anecdote tells of a young boy crying on Christmas morning because Santa hadn’t brought him “A” shares.

By its final year 1949, “A” stock’s annual dividend yield had sometimes been 20%, with total returns (including reinvested dividends and stock appreciation) averaging 21% annually for 37 years. Wachovia Bank provided employees with low-interest loans to buy shares, making wealth accumulation possible for many.

These workers, who became known as “reluctant millionaires,” hesitated to invest even $1 weekly from their $12 paycheck. Winston-Salem became known as the “Town of a Hundred Millionaires.” When a New York magazine ran a 1931 article with that title, residents insisted there were only 50 or 60—maybe 70. With a population of 75,000, the town had 10 times more millionaires per capita than the U.S. average.

By the time of RJR’s 1988 buyout, each “A” share had grown into 250 common shares worth $27,250, having paid $8,514 in dividends over its lifetime. A $242 investment in 1912 yielded a 24% annual return (with dividend distributions) over 77 years. Employees who purchased on margin with a $100 down payment saw even higher returns of 33% annually.

Yet, those who had reluctantly bought in were just as reluctant to sell, viewing their ownership not as an investment but as a way of life. They never thought of themselves as “shareholders.” To them, employment at Reynolds Tobacco was like being in a religious cult.

One such investor was Pauline Carter. In 1926, at age 16, she left school after the seventh grade to work at Reynolds Tobacco, earning $12.20 a week. Over the years, she “saved her dimes and quarters,” buying two or three shares at a time until she accumulated 42,500 shares. She retired in 1965. Some were actually distraught at having to surrender their shares, even for a larger cash payout than they had ever dreamed possible.

Forced to sell her shares in 1988, Pauline received over $3 million (C$7.9 million) after taxes but continued to live modestly. She donated $1.5 million to her church and family. At her death in 2000, she bequeathed more than $3 million to the Winston-Salem Foundation. Over the next 24 years, her gift generated $3.6 million for charitable causes and will continue supporting them for years to come.