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Wow, good thing investors in Lorillard (NYSE:LO) didn't listen to the resident experts of the analyst and hedge fund community. Just when many an analyst and hedge fund alike had been quick to declare dividend investing in U.S. tobacco stocks all but dead, a U.S. tobacco company blows out earnings and raises its dividend nearly 20%. What is most interesting to me about the Lorillard's earnings report is that the company's blowout numbers come just as many are starting to look away from dividend investing going in to the new year.

Like most traders and investors, I've had good calls and bad ones, but one of my best calls was to buy Lorillard in the mid-seventies in my first article published on Seeking Alpha. The reasons I cited for buying Lorillard were multiple, but the primary reasons I thought this was the best U.S. tobacco company to invest in were the company's fortress balance sheet and consistently strong organic growth. Lorillard's relatively smaller regulatory and litigation risk didn't hurt either. While Altria (NYSE:MO) and Reynolds (NYSE:RAI) get all the attention, Lorillard continues to be the best performing U.S. tobacco stock.

The two main advantages Lorillard has over its larger peers, Reynolds and Altria, are superior growth and less liability risk. Lorillard has just roughly 14% of the U.S. tobacco market today, compared to Altria's nearly 42% market share. Since Lorillard is a third the size of Altria and less than half the size of Reynolds, the company still has plenty of upside since it can grow its revenues in a shrinking industry by continuing to take market share from the larger players. Also, the fact that Lorillard is smaller and hasn't had as big of a presence in the U.S. tobacco industry over the last several decades, also makes it less susceptible to the larger lawsuits that have generally been won by older plaintiffs with smoking related illnesses.

Additionally, while taxes and regulation affect all the big tobacco companies, Lorillard sells their products at prices below their competitors, and has been very successful with their cheaper brands, like Maverick and Kent. The company also benefits from the 2009 Tobacco legislation, which consolidated regulation of the tobacco industry under the FDA and has made marketing and advertising tobacco products all but impossible for companies that don't already have a large foothold in the still large U.S. tobacco market.

Also, while many traders and investors have constantly been concerned about an FDA ban on menthol, legislative developments in the tobacco industry and positive statements by the FDA on their approach to how to handle menthol flavored cigarettes have diminished these concerns significantly over the last couple years. Lorillard continues to be the only U.S. tobacco company that has shown that it can consistently grow its earnings in the still very large U.S. tobacco industry. Lorillard's recent earnings report suggests this trend should continue for some time.

While earnings per share, revenue, and market share are important, the most important metric for gauging the strength of a U.S. tobacco companies is volume. Even more important in my opinon than Lorillard's decision to raise its dividend by an industry leading 20%, was was the company's strong shipment numbers. Lorillard was not just the only U.S. tobacco company to report a year over year gain in cigarettes shipped, but Lorillard's peers, like Altria, actually reported a drop in annual cigarette shipments of nearly 4%.

Shipping more cigarettes each year in a shrinking industry is not easy, and Lorillard has now accomplished this impressive feat for three consecutive years. Lorillard's wholesale shipments increased by 5.6% this year alone. This is one of the reasons why Lorillard actually saw a .8% gain in market share while Altria saw a nearly .6% drop. Lorillard was also the only U.S. tobacco company that reported a market share gain.

Now let's look at valuation. While the stock currently trades at roughly 12.5x next year earnings, tobacco stocks are primarily bought for their dividend, and Lorillard's buyback program and revenue gains have enabled the company to consistently raise its dividend at twice the industry average. Investors also seem comfortable buying tobacco shares that are able to pay at least a 5% dividend. Given that Lorillard has shown the consistent ability to grow their revenues by nearly 10% a year, and the company has raised its dividend by 20% a year for several years in a row now, I think Lorillard will trade up to around 140 dollars a share. A share price of 140 would mean their shares are trading at a roughly 25% premium to Altria's. Given that Lorillard's impressive growth and strong balance sheet has enabled the company to consistently raise their dividend at roughly twice the rate of their larger peers for several years, a 25% premium seems more than reasonable.

To conclude, while the past is not always the best predictor of the future, Lorillard's consistent market share gains and revenue growth show this company is likely to continue to outperform their larger peers. Lorillard was also the only U.S. tobacco company this year to show an increase in cigarettes shipped year over year. While the biggest companies in any sector, like Exxon Mobil (NYSE:XOM) and Apple (NASDAQ:AAPL), often get the most press, the best companies are often lesser known.

Even today, despite, Lorillard's impressive recent results, the company is still by far the smallest of the three large tobacco companies in the U.S. With a roughly 16 billion dollar market capitalization, Lorillard is less than a third the size of Altria, and still less half the size of Reynolds. Given that the Lorillard continues to innovate and return value to shareholders at rate far superior to that of their larger peers, the company's market cap seems likely to continue to grow over the coming years.

Source: Lorillard's Earnings: Why This Company Is Still The Only U.S. Tobacco Name You Should Own