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Lorillard Fires Up Smoking Dividends

By Todd Johnson on July 19, 2012

Tobacco stocks as a whole are recession-resistant, providing safety and robust dividend yields, as well as respectable growth. Case in point: Lorillard (NYSE LO) is firing on all cylinders, with the stock at 52-week highs. The stock’s total return so far in 2012 is 26.3 percent, with a 4.5 percent dividend yield.

Lorillard was founded in 1760 in Greensboro, North Carolina, where the company still has its headquarters and all its manufacturing facilities. Lorillard is the oldest and-third largest maker of cigarettes and consumable tobacco in the US with five brand families: Newport (its flagship brand), Kent, Maverick, Old Gold and True.

The company’s Newport label is the second-largest cigarette brand and the number-one menthol brand in the US. Lorillard makes and sells 43 products in all, with differences in price, packaging, target-audience positioning, cigarette length, flavor and taste.

In the face of increasing anti-smoking initiatives tied to public health, Lorillard recently expanded its portfolio to include electronic cigarettes, with its $135 million acquisition in April of blue ecigs, a company that makes tobacco-free electronic cigarettes that don’t emit smoke, cigarette smells or ash residues.

Lorillard in the first quarter of 2012 increased its US cigarette market share from 14.1 percent to 14.5 percent. The addition of blue ecigs is anticipated to boost corporate sales in future quarters.

Management and sales efforts are focused on offering electronic cigarettes through the company’s vast distribution network. Blu ecigs will operate as a separate company within the Lorillard family. With this acquisition, Lorillard hopes to get into a new growth market within the cigarette sector and expects to significantly expand sales of blu ecigs by leveraging Lorillard’s extensive sales, marketing and distribution infrastructure.

As the table below shows, Lorillard’s unit production was lower, primarily because of trade inventory pattern volatility.

Source: Lorillard

Lorillard reported first-quarter net sales of $1.5 billion, down 0.6 percent from $1.5 billion in the first quarter of 2011. Lorillard sold 2.5 percent fewer units but made up for volume declines to some extent with higher sales prices.

Despite lower production, cost of sales still rose 1.1 percent, while operating expenses saw a 7.4 percent increase led by higher legal costs tied to class action anti-tobacco litigation. Profits were also hit by an $11 million increase in interest expenses stemming from new, higher-interest debt that was issued in the third quarter of 2011.

Reported first-quarter net income was $223 million, down from $248 million in the first quarter of 2011. Earnings per share (EPS) reached $1.70, up from $1.71 in the first-quarter of 2011. Earnings were affected by a $7 million expense tied to an unfavorable recalculation of tobacco litigation settlements.

Source: Lorillard

Lorillard grew its cash reserves to $1.9 billion, up 18.1 percent from first-quarter 2011. Total assets were up 11.4 percent to $3.3 billion and long-term debt was marginally lower at $2 billion.

Source: Lorillard

Lorillard repurchased 1.6 million shares in the first quarter, at a cost of $188 million and concluded its $750 million share buyback program announced in August 2011. Lorillard has consistently paid quarterly dividends and raised dividends from $0.92 per share in the third quarter of 2008 to $1.55 in the first quarter of 2012 (see graph below).

Lorillard’s most recent dividend was $1.55 per share ($6.20 annually), paid June 11, 2012. As of July 18, 2012, shares closed at $139.64 with a dividend yield of 4.5 percent, a price-to-earnings ratio of 16.5 and a market capitalization of $18.2 billion.  

Lorillard’s second quarter should be stellar, as management continues to implement corporate stock buybacks. The icing on the cake will be if the company can continue to take domestic cigarette market share. Buy Lorillard up to 141.

What do you think of this article? Please post your feedback in the “comments” section below!

Todd Johnson publishes Dividend Lab, a web site focused on income investing.

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