Yield hungry investors are being forced by the actions of the Federal Reserve to go out on the risk curve to achieve acceptable income levels. In equities, the Consumer Staples and Utilities sectors (both traditional dividend-paying sectors) have been bid up over the last year and now sell at higher multiples than the overall market, despite their tepid growth prospects. Good portions of these sectors are paying dividends in the 3% to 4% range, which, in my opinion, does not compensate investors adequately enough to hold the shares given their recent runs. I'd much rather find yield in different income plays. Once such income opportunity is Lorillard (LO), which yields over 5%, is selling at a more reasonable valuation and has some nice things going for it.
Here are some recent positives for Lorillard:
- Consensus earnings estimates have risen for both FY 2013 and FY 2014 over the last three months.
- The FDA recently scrapped a plan to require cigarette packs carry a set of large and often macabre warning labels depicting the dangers of smoking and encouraging smokers to quit.
- The company just initiated a $500 million repurchase program.
- TheStreet recently marked the shares as a Buy-rated dividend stock
Lorillard manufactures and sells cigarettes in the United States. It has 39 product offerings in various brand names, including Newport, Kent, True, Maverick, and Old Gold.
Here are five additional reasons why LO is a solid value and income selection at $40 a share:
- The stock yields 5.5% and the company has raised its dividend payout by 80% over the last four years.
- The nine analysts who cover the stock have a $46 a share price target on the shares, some 15% above its current stock price.
- Analysts project 6% revenue growth for both FY 2013 and FY 2014, and the stock sports a very reasonable five-year projected PEG (1.44) for such a high yielder.
- The stock is fairly cheap at under 12x projected 2014's earnings. It also provides a very low beta (.43) for investors who want to lower the volatility of their portfolio.
- LO has technical support just under the current stock price level at $38.