The Lorillard Fire Sale

| About: Lorillard, Inc. (LO)

Executive summary:

  • Unlike most tobacco stocks, LO had a great 2013 but 2014 is catching up with it, too.
  • Shares are down 6% today as of this writing, backed up an EPS that came in 4 cents lower that estimates for 2013 Q4.
  • For long term income investors, this presents a buying opportunity.
  • Double digit earnings potential, high yield, and dividend growth await investors.


Lorillard Inc (NYSE:LO) reported its 2013 Q4 results a few hours ago, as Seeking Alpha has covered here. Here are a few key numbers from the announcement:

  • EPS came in at 82 cents per share, 4 cents below the estimate of 86 cents per share.
  • Revenue beat by $430 Million
  • Retail share of the market went up for the 11th consecutive year, to almost 15%.
  • Lorillard's blu eCigs is still the market leader in that category, with a market share of almost 50%.
  • Lorillard repurchased 4.6 Million shares in Q4 2013.

So, what's so wrong in the numbers above that the stock is down almost 6% as of this writing? Perhaps investors were looking for dividend increase announcement along with the call (we did). Or perhaps the 4 cents miss seemed disastrous. To put the 82 cents earnings per share into context, it is still almost 4% more than the 2012 Q4 number. This is also the first time that Lorillard has reported lower than expected in at least the last 5 quarters.

To put the statements above in a nutshell, the 6% drop seems extreme and in our opinion offers a good entry point into Lorillard.

Lorillard has been a dividend growth stock as the table below shows. The company has now paid the same quarterly dividend of 55 cents per share for 4 quarters and that means we can expect a dividend increase. Yes, last year the company announced the dividend increase along with the Q4 results but that does not mean there will not be an increase this year.

(Source: Table compiled with data from Yahoo Finance)

Lorillard's 2013 was much better than the other well known tobacco stocks, and its yield suffered as a result. At one point, it was yielding the lowest among the big tobacco names but this current pullback puts its yield very close to 5%, which is higher than Philip Morris' (NYSE:PM) yield and is very close to Reynolds American Inc's (NYSE:RAI) yield. Altria Group (NYSE:MO) is still the leader by a handsome margin in the yield category.

Tobacco stocks are usually very close to each other in terms of valuation, yield, and earnings growth and that can sometimes make it hard for investors to decide where to put the money on. In such cases, we use the table below using some very simple metrics and arrive at a conclusion.

Lorillard appears like the best pick based on all three parameters used below. And no, we've not changed the parameters to fit Lorillard here as this table has been used in some of the past articles as well. The cumulative rank is the average of a company's rank in each category.

(Source: Table compiled with data from Yahoo Finance)

But what about the dividend increase ? The company has time till the next quarter's payment to reward shareholders with an increase. The table below shows what the yield on cost could be for a patient investor if Lorillard increases dividends at 7% per year for the next five years. Over 10 years, Lorillard's high yield and dividend growth could potentially double the yield on cost for investors who stick through.

Conclusion: So, as surmised in this article, 2014 continues to present income investors with a lot of opportunities to pick up bargains. Until today, Lorillard had avoided the selling that most income stocks have seen in 2014. Lorillard is no doubt a great stock to hold for income investors for its:

  • Low beta of 0.35
  • Solid dividend yield of 4.80%
  • Dividend growth history
  • E-cigarettes potential
  • And double digit earnings potential

Disclosure: I am long PM, MO, LO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.