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U.S. tobacco stocks have luxurious yields. Yet, a big problem lurks: Cigarette companies are in a declining business. Americans are smoking less. Surprisingly, earnings have held up well, and are, in many cases, rising. Still, although those juicy dividends beckon, investors should look for companies bucking the trend and actually selling more product.

Look no further than Lorillard (LO), maker of Newport cigarettes. Despite a sagging tobacco industry, the company has boosted its market share. In 2006, Lorillard had a 9.6% share. Every year since, it's increased its slice. Now it owns 14.2% of the domestic market, largely because it dominates menthol, where it has almost a 40% share. This company is looking to take bigger hunks out of a smaller cigarette pie.

In contrast to Altria (MO), Reynolds (RAI), and Vector Group (VGR), Lorillard's business is expanding. Lorillard is selling more cigarettes, something no other domestic tobacco has been able to do.

Lorillard has raised its dividend from 92 cents to $1.30 in 3 years, over a 40% bump, far more aggressively than its competition. You don't do that without both growth and earnings. Lorillard is the best of domestic tobacco. With a P/E lower than its competitors, this one is undervalued. Lorillard deserves to sell at a premium to its peers.

In the graphs below, 2011 represents the year run rate projected from the first 6 months.


Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Past performance of the companies discussed may not continue, and the companies may not achieve the earnings growth predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Source: Lorillard Commands More Market Share In A Shrinking Tobacco Market