Lorillard Tobacco Company was founded in 1760 by Pierre Abraham Lorillard. It goes without saying that the company has seen some pretty good things happen... It is also the third largest tobacco industry in the USA for the cigarette market under the brands Newport, Maverick, Old Gold, Kent, True, Satin, And Max. In 2008, Lorillard Tobacco entered into a separation agreement with its parent company Loews, and became an independent, publicly traded company. Lorillard is part of my strategy Smoking & Drinking Dividends, which seeks to obtain attractive income, while protecting itself against currency and market risk.
Newport, Lorillard's menthol cigarette, represents 94% of its revenue, 92% of its volumes, 34% of market share of all menthol cigarette sales in the United States, as well as 10% of market share for the entire US tobacco industry. The Greensboro-based company is run by CEO Martin Orlowsky, who works at Lorillard for 20 years.
In April 2012, Lorillard purchased the electronic cigarette company ecigs Blu, for $135 million, marking the tobacco industry's first foray into the market. The company had revenue of about $30 million in 2010, with products sold in more than 13,000 retail locations, including Walgreen's (NYSE:WAG).
Lorillard participates in an economically independent industry, whose long-term returns are not based on general U.S. economic conditions. The cigarette industry is protected by extensive regulation, economies of scale and, not least, consumer brand loyalty. The latter allows tobacco companies to increase their prices faster than volumes fall. A pack of cigarettes costs 25 cents to produce, but can be sold for 20 times that amount!
27-28% of cigarettes consumed in the USA belong to the menthol category. Lorillard continues to increase its market share thanks to menthol, which benefits from a less harmful evolution of volumes than the rest of the tobacco group, with better margins and a more loyal customer base. According to Merrill Lynch, 1,000 Newport cigarettes generate a profit of more than $36, compared to $28 per $ at Altria/Philip Morris USA.
Despite these attractive fundamentals, and the current high market level, Lorillard is still trading at an attractive price, which is confirmed by a PE of 13.24 and a current yield of 5.2%. The average yield over the longer term is nevertheless slightly higher, at 5.71%. The dividend is increasing at an average annual rate of 15.04%, although it should be noted that the last increase, dated February 27, 2013, is more modest, at 6.45%. Over the next five years, the dividend should increase less steadily, with an estimated annual average of 7.75%, which is still interesting. Despite the generous yield, Lorillard is not squandering its profits, since only 2/3 are used to pay the dividend.
A small shadow on the picture, LO, like many other companies in the sector, displays a fairly high volatility, with 27.61%. However, and also like its competitors, this nervousness of the prices is only slightly linked to that of the market, which is attested by a beta of 0.38.
Perhaps the most remarkable thing about Lorillard is its ability to protect itself from dollar fluctuations, even though the company only operates in the United States, meaning that it administers, manufactures and sells only in this country. Any non-US investor should indeed be careful when buying American securities, because of the structural weakness of the greenback. Precisely, Lorillard tends to gain value in CHF when the dollar weakens, which is attested by a $risk of -0.43.
A good yield, good dividend growth, a distribution ratio that is nevertheless prudent, a title that is a little too volatile, but little linked to economic variations and good protection against market risk. Lorillard undeniably has a lot of qualities, which translates into a rating of 4 stars.
Of course, not everything is rosy in the tobacco industry, as you already know. because of the risks it poses to public health. Lorillard is no exception to this rule since the company lost a lawsuit in 2010, with $151 million to pay out, and a fairly tarnished brand image. This could rightly hold back a fair number of investors. However, I think that if you want to invest strictly ethically, then you might as well not invest at all because the vast majority of companies listed on the stock exchange are constantly navigating on both sides of the border between legality and social responsibility.
For all these reasons I decided to buy Lorillard on August 19th.
Sources: Wikipedia, Wikinvest, Yahoo Finance, Swissquote, dividends.ch
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Hello Jerome,
Lorillard is an attractive company, as you pointed out, because of its leadership in the menthol cigarette sector.
I would also like to draw the attention of loyal readers to the following points:
– the debt is very high, the company's equity is negative. There is therefore an obligation to maintain a net profit as high as today so that the company continues to distribute cash to its shareholders;
– share buybacks at a frantic pace, Lorillard is constantly buying back shares to cancel them: in 5 years more than 28 % shares have been cancelled, going from 521 million in 2008 to 375 million in the 2nd quarter of 2013. This is a very good thing for shareholders, especially since the buyback program is still continuing until 2014. We can just see that the buyback trend has been slowing down for several quarters;
– FDA's proposed ban on menthol sales in late July 2013, yes it didn't pass but imagine the impact on Lorillard. It would really be a disaster. Despite this announcement, the share price has barely dropped (-5 % compared to the current price). I can't explain this non-reaction of the market. Maybe the shareholders know that the powerful tobacco lobby would never have let this kind of law pass;
– Very important target achievement bonuses are distributed to managers. This is a pretty good sign for the company's continued success. Since the managers are "financially" involved, we can hope that this will motivate them even more!
– purchase of an electronic cigarette subsidiary “blu e-cig”. It is important that Lorillard positions itself on this emerging market. However, it seems that the quality of the products is rather in the low range while the price remains high. Marketing is very present, look at the TV spots with Jenny McCarthy! However, the subsidiary's results only represent a few million dollars, which is to say almost nothing on the scale of the company. Subject to follow!
For all reasons, I also took the step and recently bought the stock in the 42 $. I am more oriented towards an undervaluation of the stock than towards a yield with a continuous increase in dividends. What do you think?
Thank you for this excellent feedback PapaOurs. Regarding the outright ban on menthol cigarettes in the United States, the country of economic laissez-faire, I don't believe in it. At most there will be a little more regulation and taxes, which can strengthen the monopolistic position of market leaders, preventing new competition from emerging. While we're at it, if the USA decides to eliminate menthol cigarettes, then they can also ban McDonald's Happy Meal, which targets an even younger audience, with equally disastrous consequences for health.
To go along with PapaOurs, I am also wary of regulations banning the sale of menthol cigarettes. As an example closer to home, the EU is considering banning "slim" cigarettes as well as menthol cigarettes. In another area but to take your example, California has already banned toys from "Happy Meal" menus. On the other hand, we can imagine that in the event of a ban on the molecule causing the menthol sensation currently used, the R&D department will quickly find another one.
That being said, LO's financial situation is very appreciable. The only downside for a DG investor: the dividend history is very (too) short for my taste, the company having only paid dividends since 2008.
In the cigarette business, I have preferred to invest in PM and MO for the moment. However, it is not excluded that I initiate a line on LO, but not immediately: I am waiting for a slightly more substantial dividend history.
It is true that the history is weak and that is why Lorillard is not included in the Global Dividend Growers. I use LO rather to hedge against market and currency risk. That being said, despite the youth of the stock market listing, the company's history is monstrous. And it is not a surge of American moralizing wave (one more) that will scare it.