Seeking Alpha
Profile| Send Message| ()  

"The wicked work harder to preach hell than the righteous do to get to heaven."

American Proverb

Lorillard, Inc. (LO), founded in 1760 manufacturers and sells cigarettes in the United States; Newport, Kent, True, Old gold and Maverick are some of its top selling brands. Its products are primarily sold to wholesale distributors; these wholesale distributors service chain stores, retail outlets, government agencies (U.S. Armed forces), etc. We like Lorillard for the following reasons:

It approved a 19% increase in its quarterly dividend from $1.30-$1.55 per share.

Earnings per share are projected to increase from $7.88 in 2011, to $8.92 in 2012 to $9.87 in 2013.

It continues to gain market share in a declining industry. Newport is the largest menthol brand in the US. Its domestic market share climbed 0.8 points and now stands at 14% in the 4th quarter. For 2011, its share soared to 14.1%. Its brand name enables it to charge premium prices, which add to profitability.

The launch of the new port Non-menthol brand appears to be well received and should contribute to the bottom line and help it increase local market share.

Reasons to be bullish on Lorillard, Inc Common Stock (LO):

  • It has a strong free cash flow of $1.19 billion.
  • A dividend yield of 4.65%
  • A strong 5 year dividend growth rate of 29%
  • A five year dividend average of 4.56%
  • It is the 3rd largest cigarette producer in the US; it has a strong and flexible balance sheet, produces boat loads of free cash and earnings.
  • Net income has increased from $948 million in 2009 to $1.16 billion in 2011.
  • Annual EPS before NRI has increased from $4.91 in 2007 to $7.88 in 2011
  • Sales have risen nicely over the past three years from $5.2 billion in 2009 to $6.4 billion in 2011.
  • Zacks projects a 3-5 year EPS growth rate of 11%
  • A current ratio of 1.73
  • A strong ROI of 92%
  • A decent payout ratio of 66%
  • A decent quick ratio of 1.54
  • A strong interest coverage ratio of 15.14
  • A 5 year average payout ratio of 60%
  • 4th quarter adjusted (Non-GAP) diluted earnings per share increased 26.4% compared to last year.
  • 4th quarter (GAAP) diluted earnings per share increased 33.3% versus last year to 2.32 and annual diluted earnings per share increased 17.8% to $7.99.
  • Net sales in the 4th quarter increased by 8.9% to $1.61 billion; annual sales increased by 9% to $6.45 billion.
  • It repurchases 3.3 million shares in the 4th quarter at a cost of $366 million, under the $750 million program that it announced in August of 2011.
  • It has a decent free cash flow yield of 6.5%
  • It also sports a revenue growth rate of 8.89%
  • 100K invested for 10 years would have grown to $792K.

click to enlarge

Many key ratios will be covered in this article and investors would do well to get handle on some of the more important ones which are dealt with below.

Long-term debt-to-equity ratio - is the total long term debt divided by the total equity. The amount of long-term debt a company carries on its balances sheet is very important for it indicates the amount of money a company owes that it doesn't expect to pay off in the next year. A balance sheet that illustrates that long term debt has been decreasing for a few years is a sign that the company is doing well. When debt levels fall, and cash levels increase the balance sheet is said to be improving and vice versa. If a company has too much debt on its books, it could end up being overwhelmed with interest payments and risk having too little working capital which could in the worst case scenario lead to bankruptcy.

Operating cash flow -is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt; the cash flow is what pays the bills.

The payout ratio -tells us what portion of the profit is being returned to investors. A pay out ratio over 100% indicates that the company is paying out more money to shareholders, then they are making; this situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for sometime. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever; if your tolerance for risk is a low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of 5 Covered Writes: 2 Excellent, 2 Good And 1 Middling

Current Ratio -is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardizing their future earnings. Ideally the company should have a ratio of 1 or higher.

Price to free cash flow- is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa; lower ratios are generally more attractive. If a company generated 400 million in cash flow and then spent 100 million on capital expenditure, then its free flow is $300 million. If the share price is 100 and the free cash flow per share are $5, then company trades at 20 times-free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry; this gives you an idea of how the company you are interested in holds up to the other companies within the industry.

Interest coverage- is usually calculated by dividing the earnings before interest and taxes for a period of 1 year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. For example if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

Price to tangible book is- obtained by dividing share price by tangible book value per share. The ratio gives investors some idea of whether they are paying too much for what would be left over if the company were to declare bankruptcy immediately. In general stocks that trade at higher price to tangible book value could leave investors facing a great percentage per share loss than those that trade at lower ratios. The price to tangible book value is theoretically the lowest possible price the stock would trade to. Additional key metrics are addressed in this article 5 Dividend Champs: Halliburton Our Top Pick

Company: Lorillard Co

Levered Free Cash Flow = 1.19B

Basic Key ratios

  1. Percentage Held by Insiders = 0.33
  2. Number of Institutional Sellers 12 Weeks = 4

Growth

  1. Net Income ($mil) 12/2011 = 1116
  2. Net Income ($mil) 12/2010 = 1029
  3. Net Income ($mil) 12/2009 = 948
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 8.56
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = 19.69
  1. EBITDA ($mil) 12/2011 = 1932
  2. EBITDA ($mil) 12/2010 = 1764
  3. EBITDA ($mil) 12/2009 = 1578
  4. Net Income Reported Quarterlytr ($mil) = 310
  5. Annual Net Income this Yr/ Net Income last Yr = 8.46
  6. Cash Flow ($/share) 12/2011 = 8.43
  7. Cash Flow ($/share) 12/2010 = 7.11
  8. Cash Flow ($/share) 12/2009 = 6.1
  1. Sales ($mil) 12/2011 = 6466
  2. Sales ($mil) 12/2010 = 5932
  3. Sales ($mil) 12/2009 = 5233
  1. Annual EPS before NRI 12/2007 = 4.91
  2. Annual EPS before NRI 12/2008 = 5.15
  3. Annual EPS before NRI 12/2009 = 5.76
  4. Annual EPS before NRI 12/2010 = 6.78
  5. Annual EPS before NRI 12/2011 = 7.88

Dividend history

  1. Dividend Yield = 4.65
  2. Dividend Yield 5 Year Average 12/2011 = 4.56
  3. Dividend Yield 5 Year Average 09/2011 = 4.56
  4. Annual Dividend 12/2011 = 5.2
  5. Annual Dividend 12/2010 = 4.25
  6. Forward Yield = 4.65
  7. Dividend 5 year Growth 12/2011 = 29.5

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.66
  2. Payout Ratio 5 Year Average 12/2011 = 0.61
  3. Payout Ratio 5 Year Average 09/2011 = 0.61
  4. Payout Ratio 5 Year Average 06/2011 = 0.6
  5. Change in Payout Ratio = 0.05

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = 31
  2. Next 3-5 Year Estimate EPS Growth rate = 11
  3. EPS Growth Quarterly(1)/Q(-3) = -128.66
  4. Return on Investment 06/2011 = 92.58
  5. Current Ratio 06/2011 = 1.73
  6. Current Ratio 5 Year Average = 1.85
  7. Quick Ratio = 1.54
  8. Cash Ratio = 1.48
  9. Interest Coverage Quarterly = 15.14

Valuation

  1. Book Value Quarterly = -11.21
  2. Price/ Cash Flow = 15.83
  3. Price/ Sales = 2.72
  4. EV/EBITDA 12 Mo = 9.61

Company: Reynolds American (RAI)

Levered Free Cash Flow = 1.59B

Basic Key ratios

  1. Percentage Held by Insiders = 0.17
  2. Number of Institutional Sellers 12 Weeks = 14

Growth

  1. Net Income ($mil) 12/2011 = 1406
  2. Net Income ($mil) 12/2010 = 1121
  3. Net Income ($mil) 12/2009 = 955
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 19.32
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = -1.62
  1. EBITDA ($mil) 12/2011 = 2545
  2. EBITDA ($mil) 12/2010 = 2614
  3. EBITDA ($mil) 12/2009 = 1917
  4. Net Income Reported Quarterlytr ($mil) = 304
  5. Annual Net Income this Yr/ Net Income last Yr = 25.42
  6. Cash Flow ($/share) 12/2011 = 3.06
  7. Cash Flow ($/share) 12/2010 = 2.8
  8. Cash Flow ($/share) 12/2009 = 2.57
  1. Sales ($mil) 12/2011 = 8541
  2. Sales ($mil) 12/2010 = 8551
  3. Sales ($mil) 12/2009 = 8419
  1. Annual EPS before NRI 12/2007 = 2.29
  2. Annual EPS before NRI 12/2008 = 2.4
  3. Annual EPS before NRI 12/2009 = 2.32
  4. Annual EPS before NRI 12/2010 = 2.49
  5. Annual EPS before NRI 12/2011 = 2.81

Dividend history

  1. Dividend Yield = 5.4
  2. Dividend Yield 5 Year Average 12/2011 = 6.38
  3. Dividend Yield 5 Year Average 09/2011 = 6.38
  4. Annual Dividend 12/2011 = 2.15
  5. Annual Dividend 12/2010 = 1.84
  6. Forward Yield = 5.4
  7. Dividend 5 year Growth 12/2011 = 7.2

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.84
  2. Payout Ratio 5 Year Average 12/2011 = 0.76
  3. Payout Ratio 5 Year Average 09/2011 = 0.76
  4. Payout Ratio 5 Year Average 06/2011 = 0.76
  5. Change in Payout Ratio = 0.07

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = 8.43
  2. Next 3-5 Year Estimate EPS Growth rate = 6.03
  3. EPS Growth Quarterly(1)/Q(-3) = -122.03
  4. ROE 5 Year Average 12/2011 = 20.62
  5. ROE 5 Year Average 09/2011 = 20.62
  6. ROE 5 Year Average 06/2011 = 20.49
  7. Return on Investment 06/2011 = 15.88
  8. Debt/Total Cap 5 Year Average 12/2011 = 37.36
  9. Debt/Total Cap 5 Year Average 09/2011 = 37.36
  10. Debt/Total Cap 5 Year Average 06/2011 = 37.4
  1. Current Ratio 06/2011 = 1.01
  2. Current Ratio 5 Year Average = 1.2
  3. Quick Ratio = 0.78
  4. Cash Ratio = 0.73
  5. Interest Coverage Quarterly = 11.55

Valuation

  1. Book Value Quarterly = 10.72
  2. Price/ Book = 3.87
  3. Price/ Cash Flow = 13.55
  4. Price/ Sales = 2.78
  5. EV/EBITDA 12 Mo = 9.82

Company: Vector Grp Ltd (VGR)

Levered Free Cash Flow = 73.27M

Basic Key ratios

Percentage Held by Insiders = 20

Growth

  1. Net Income ($mil) 12/2011 = 75
  2. Net Income ($mil) 12/2010 = 54
  3. Net Income ($mil) 12/2009 = 25
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 38.71
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = -35.11
  1. EBITDA ($mil) 12/2011 = 234
  2. EBITDA ($mil) 12/2010 = 180
  3. EBITDA ($mil) 12/2009 = 107
  4. Net Income Reported Quarterlytr ($mil) = 8
  5. Annual Net Income this Yr/ Net Income last Yr = 38.72
  6. Cash Flow ($/share) 12/2011 = 0.8
  7. Cash Flow ($/share) 12/2010 = 0.88
  8. Cash Flow ($/share) 12/2009 = 0.8
  1. Sales ($mil) 12/2011 = 1133
  2. Sales ($mil) 12/2010 = 1063
  3. Sales ($mil) 12/2009 = 801
  1. Annual EPS before NRI 12/2007 = 0.72
  2. Annual EPS before NRI 12/2008 = 0.73
  3. Annual EPS before NRI 12/2009 = 0.65
  4. Annual EPS before NRI 12/2010 = 0.73
  5. Annual EPS before NRI 12/2011 = 0.66

Dividend history

  1. Dividend Yield = 8.98
  2. Dividend Yield 5 Year Average 12/2011 = 9.46
  3. Dividend Yield 5 Year Average 09/2011 = 9.46
  4. Annual Dividend 12/2011 = 1.56
  5. Annual Dividend 12/2010 = 1.49
  6. Forward Yield = 8.98
  7. Dividend 5 year Growth 12/2011 = 5.04

Dividend sustainability

  1. Payout Ratio 06/2011 = 2.57
  2. Payout Ratio 5 Year Average 12/2011 = 2.08
  3. Payout Ratio 5 Year Average 09/2011 = 2.08
  4. Payout Ratio 5 Year Average 06/2011 = 2.06
  5. Change in Payout Ratio = 0.48

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = 0.76
  2. EPS Growth Quarterly(1)/Q(-3) = 122.63
  3. ROE 5 Year Average 12/2011 = 246.47
  4. ROE 5 Year Average 09/2011 = 246.47
  5. ROE 5 Year Average 06/2011 = 230.85
  6. Return on Investment 06/2011 = 10.06
  7. Debt/Total Cap 5 Year Average 12/2011 = 81.22
  8. Debt/Total Cap 5 Year Average 09/2011 = 81.22
  9. Debt/Total Cap 5 Year Average 06/2011 = 78.23
  1. Current Ratio 06/2011 = 1.62
  2. Current Ratio 5 Year Average = 2.21
  3. Quick Ratio = 1.27
  4. Cash Ratio = 1.16
  5. Interest Coverage Quarterly = 1.49

Valuation

  1. Book Value Quarterly = -1.12
  2. Price/ Cash Flow = 22.16
  3. Price/ Sales = 1.25
  4. EV/EBITDA 12 Mo = 7

Company: Sanofi-Aventis (SNY)

Levered Free Cash Flow = 7.22B

Basic Key ratios

Percentage Held by Insiders = 1

Growth

  1. Net Income ($mil) 12/2011 = 8265
  2. Net Income ($mil) 12/2010 = 7597
  3. Net Income ($mil) 12/2009 = 7937
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 13.26
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = 216.95
  1. EBITDA ($mil) 12/2011 = 15143
  2. EBITDA ($mil) 12/2010 = 14246
  3. EBITDA ($mil) 12/2009 = 15448
  4. Net Income Reported Quarterlytr ($mil) = 1887
  5. Annual Net Income this Yr/ Net Income last Yr = 8.78
  6. Cash Flow ($/share) 12/2011 = 7.35
  7. Cash Flow ($/share) 12/2010 = 7.39
  8. Cash Flow ($/share) 12/2009 = 7.07
  1. Sales ($mil) 12/2011 = 45972
  2. Sales ($mil) 12/2010 = 41395
  3. Sales ($mil) 12/2009 = 40201
  1. Annual EPS before NRI 12/2007 = 3.64
  2. Annual EPS before NRI 12/2008 = 3.98
  3. Annual EPS before NRI 12/2009 = 4.45
  4. Annual EPS before NRI 12/2010 = 4.81
  5. Annual EPS before NRI 12/2011 = 4.36

Dividend history

  1. Dividend Yield = 3.54
  2. Dividend Yield 5 Year Average 12/2011 = 3.34
  3. Dividend Yield 5 Year Average 09/2011 = 3.34
  4. Annual Dividend 12/2011 = 1.37
  5. Annual Dividend 12/2010 = 1.1
  6. Forward Yield = 7.4
  7. Dividend 5 year Growth 12/2011 = 5.26

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.34
  2. Payout Ratio 5 Year Average 12/2011 = 0.27
  3. Payout Ratio 5 Year Average 09/2011 = 0.27
  4. Payout Ratio 5 Year Average 06/2011 = 0.27
  5. Change in Payout Ratio = 0.07

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = 0.96
  2. Next 3-5 Year Estimate EPS Growth rate = 1.9
  3. EPS Growth Quarterly(1)/Q(-3) = 116.39
  4. ROE 5 Year Average 12/2011 = 16.36
  5. ROE 5 Year Average 09/2011 = 16.36
  6. ROE 5 Year Average 06/2011 = 16.33
  7. Return on Investment 06/2011 = 11.19
  8. Debt/Total Cap 5 Year Average 12/2011 = 12.09
  9. Debt/Total Cap 5 Year Average 09/2011 = 12.09
  10. Debt/Total Cap 5 Year Average 06/2011 = 12.09
  1. Current Ratio 06/2011 = 1.54
  2. Current Ratio 5 Year Average = 1.58
  3. Quick Ratio = 1.09
  4. Cash Ratio = 0.5
  5. Interest Coverage =12.10

Valuation

  1. Book Value Quarterly = 29.95
  2. Price/ Book = 1.32
  3. Price/ Cash Flow = 5.37
  4. Price/ Sales = 2.19
  5. EV/EBITDA 12 Mo = 7.61

Company: Pepsico Inc (PEP)

Levered Free Cash Flow = 4.83B

Basic Key ratios

  1. Percentage Held by Insiders = 0.37
  2. Number of Institutional Sellers 12 Weeks = 1

Growth

  1. Net Income ($mil) 12/2011 = 6443
  2. Net Income ($mil) 12/2010 = 6320
  3. Net Income ($mil) 12/2009 = 5946
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 1.95
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = 3.66
  1. EBITDA ($mil) 12/2011 = 12427
  2. EBITDA ($mil) 12/2010 = 11462
  3. EBITDA ($mil) 12/2009 = 10111
  4. Net Income Reported Quarterlytr ($mil) = 1415
  5. Annual Net Income this Yr/ Net Income last Yr = 1.95
  6. Cash Flow ($/share) 12/2011 = 6.25
  7. Cash Flow ($/share) 12/2010 = 5.68
  8. Cash Flow ($/share) 12/2009 = 4.79
  1. Sales ($mil) 12/2011 = 66504
  2. Sales ($mil) 12/2010 = 57838
  3. Sales ($mil) 12/2009 = 43232
  1. Annual EPS before NRI 12/2007 = 3.38
  2. Annual EPS before NRI 12/2008 = 3.68
  3. Annual EPS before NRI 12/2009 = 3.71
  4. Annual EPS before NRI 12/2010 = 4.13
  5. Annual EPS before NRI 12/2011 = 4.4

Dividend history

  1. Dividend Yield = 3.1
  2. Dividend Yield 5 Year Average 12/2011 = 2.8
  3. Dividend Yield 5 Year Average 09/2011 = 2.8
  4. Annual Dividend 12/2011 = 2.03
  5. Annual Dividend 12/2010 = 1.89
  6. Forward Yield = 3.1
  7. Dividend 5 year Growth 12/2011 = 7.55

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.47
  2. Payout Ratio 5 Year Average 12/2011 = 0.47
  3. Payout Ratio 5 Year Average 09/2011 = 0.47
  4. Payout Ratio 5 Year Average 06/2011 = 0.47
  5. Change in Payout Ratio = -0.01

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -4.3
  2. Next 3-5 Year Estimate EPS Growth rate = 8
  3. EPS Growth Quarterly(1)/Q(-3) = -155.41
  4. ROE 5 Year Average 12/2011 = 34.67
  5. ROE 5 Year Average 09/2011 = 34.67
  6. ROE 5 Year Average 06/2011 = 34.58
  7. Return on Investment 06/2011 = 15.82
  8. Debt/Total Cap 5 Year Average 12/2011 = 36.54
  9. Debt/Total Cap 5 Year Average 09/2011 = 36.54
  10. Debt/Total Cap 5 Year Average 06/2011 = 35.24
  1. Current Ratio 06/2011 = 0.96
  2. Current Ratio 5 Year Average = 1.21
  3. Quick Ratio = 0.75
  4. Cash Ratio = 0.37
  5. Interest Coverage Quarterly = 8.35

Valuation

  1. Book Value Quarterly = 13.44
  2. Price/ Book = 4.95
  3. Price/ Cash Flow = 10.65
  4. Price/ Sales = 1.59
  5. EV/EBITDA 12 Mo = 9.79

Conclusion

The markets are rather overbought and need to let out some steam; prudent investors would do well to wait for a strong pullback before committing funds to this market. A pullback in the 7-12% ranges would qualify as a strong pullback.

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware

Note on the data in this article: EPS, Price, EPS surprise charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Consensus estimate analysis table sourced from reuters.com. Free cash flow yield, income from cont operations, and revenue growth sourced from Ycharts.com.

Source: 5 Alluring Dividend Candidates: Lorillard Is Our Top Choice