Will the Lorillard Tobacco Company Go up in Smoke?

By Ryan Guenette - August 1, 2012 | Tickers: MO, BTI, LO, PM, RAI | 0 Comments

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The year is 1760, and a French Protestant named Pierre Lorillard begins to sell his tobacco goods, which to keep fresh he packages in dried animal bladders, in Colonial New York City. Pierre Lorillard makes these tobacco products on Chatham Street, present-day Park Row, in a “snuff-grinding” factory. Lorillard utilizes the profits he derives from his tobacco business to help fund the Revolutionary War. Lorillard’s contributions to the American Independence movement helped fund George Washington’s army, which in turn, assisted the American army in pushing the British force out of New York. This effort was not made early enough to save Lorillard, who perished in 1776.

Now nearly 252 years after the establishment of Lorillard Incorporated (NYSE: LO), the publicly traded tobacco company is set to open up at around $127.00 per share, and is the country’s third largest cigarette manufacturer, with a market capitalization of 16.63 billion. The one-man operation of the 1760’s has transformed into a globally recognized brand. Since Lorillard began trading as an independent public company on June 10^th, 2008 at $72.85, Lorillard has been on a tear, rising 74.95% to $127.45. Despite this success, recent events have led to heavy pushes to ban menthol, a main ingredient in Lorillard’s Newport cigarettes, a product that accounts for nearly 90% of Lorillard’s sales. So will Lorillard be able to continue to kindle the fire, or will this 252 year old business go up in smoke?

Growth Is Not Lighting Up

In 2010, Lorillard reported earnings per share of $6.78. In 2011, Lorillard stated that earnings per share had risen $1.21, to $7.99, which represents 17.85% year over year earnings per share growth. In 2012, the average consensus has Lorillard’s earnings per share rising to $8.58, displaying slackening year over year earnings per share growth of 7.38%. Growth is set to stabilize in 2013, as the street expects the company to derive $9.66 of earnings per share from its business, presenting 11.18% year over year earnings per share growth. The trend of rising and falling growth rates is expected to continue in 2014, as analysts project its earnings per share to reach $9.97, displaying meager year over year earnings per share growth of 3.21%. Lorillard’s earnings growth may be a little inconsistent, but what is consistent is the fact that Lorillard is set to expand these earnings in the foreseeable future. Lorillard’s growth will be derived from its persistent effort to gain a larger share of the United States tobacco industry. Lorillard has succeeded in this sector in the past, as shown by the chart below.

Lorillard’s earnings per share growth is not going to drive the company’s stock to incredible highs, but at the end of the day, Lorillard is set to make more money in earnings per share each and every year, as displayed by the below chart, which represents Lorillard’s sales, operating profit, net income, net margin, and operating margin in the coming years.

Dividend Will Help Fund Cigarette Purchases

The tobacco industry is prominently known for its huge dividend payouts, and Lorillard does not break this trend. In fact, Lorillard pays out one of the largest dividends in the industry, annually yielding around 4.8% at current prices. This dividend has grown substantially from $5.20 annually, just a year ago, and is expected to continue to grow and expand in the foreseeable future. In 2013, the consensus dividend yield increase is 10.48%, to $6.85. At current prices that would enter Lorillard into a selective club of 5% yielders. In 2014, the street anticipates Lorillard’s dividend to be raised even higher, to $7.24 annually, representing 5.69% year over year dividend growth. At current prices, that would set Lorillard’s dividend yield at 5.68%, well north of the ten year treasury rate of 1.58%. Lorillard’s growing dividend is displayed in the chart below. Also displayed is Lorillard’s earnings per share, and rate of dividend, or the percentage of net income that is paid out in the dividend.

Is Lorillard the Top Smoke?

Compared to some of Lorillard’s largest competitors, such as Reynolds American Incorporated (NYSE: RAI), Altria Group Incorporated (NYSE: MO), Philip Morris International Incorporated (NYSE: PM), and British American Tobacco PCL (NYSEMKT: BTI), Lorillard relates favorably.   

Lorillard is in the middle of the road in terms of growth, while Reynolds American tops the charts, doubling its earnings per share in five years. Lorillard has the second biggest dividend in the industry, with Reynolds American once again holding the top position. Lorillard’s dividend growth is the most accelerated in the industry, which will lead to it paying the largest dividend, in terms of yield, in 2014. In both ratios comparing the fundamental value of the company, Lorillard possesses the lowest valuation, speaking to the fact that Lorillard is the cheapest stock in the industry. In the net profit margin sector, Lorillard places second to worst, while Phillip Morris tops the industry.

The Foolish Bottom Line

I do not smoke cigarettes. I do not want anyone I love or care about to smoke cigarettes. Cigarettes are extremely harmful to their users; this fact has been proven over and over again by numerous studies. Smoking has been linked to a plethora of illnesses and diseases, sometimes fatal. Cigarettes should be banned from the face of the Earth, but the reality is that cigarettes are a major economic industry, and provide a huge amount of income for the government through taxes. In this volatile economic environment, banning cigarettes is going to be far from the top on the list of priorities in the United States government. When push comes to shove, the United States economy is on the verge of another recession, and a consistent consumer staple such as Lorillard will provide a generous 5% yield and decent growth. Lorillard has been around since the birth of the United States, and will be around for many years to come.         

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