Flush with cash from the recent sale of one of my oldest holdings in Total S.A. (TOT), I decided to initiate a new position in a stock that I've been looking at over the last 30 days or so. I like particular industries that are profitable, easy to understand and sell products that people purchase in up and down economies. Tobacco certainly fits the bill here, and adds an even more interesting element to the mix in the fact that it's an addictive product. I really love Philip Morris International (NYSE:PM) in this space, and it's my favorite tobacco stock of all. However, I like to stay diversified and hedge my bets, and with, PM already my largest holding I decided to look elsewhere.
As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.
I purchased 20 shares of Lorillard Inc. (LO) on 10/9/12 for $116.09 per share. This purchase gives me a 5.34% entry yield on my purchase. I, of course, could have received a better price had I waited to purchase today, but with LO already down considerably from its July highs of over $140 per share, I felt I received a strong price from the market for this company. I always try to keep perspective on purchases, which requires a long view and one which should not be compromised or swayed by short-term market movements.
Lorillard is the third largest cigarette manufacturer in the U.S., and Newport, its flagship brand, claims a 14% share of the U.S. cigarette market. Although the strength of this brand primarily comes from the menthol category, with a 36% share, they are also making inroads with their newer non-menthol Newport Reds. Although they sell other discount brands, Newport accounted for 88% of revenue in 2011. Newport is the crown jewel, make no mistake about it.
The reason I decided to invest in Lorillard is because I believe they still have considerable growth ahead of them. Although they sold their rights to international sales back in 1977 and operate solely as a domestic cigarette manufacturer, they are stealing market share from competitors. As I said earlier, I like to hedge my bets. I like Altria Group (NYSE:MO) with the strength of their Marlboro brand in this space, but Newport has been making gains on the Marlboro brand. They've grown market share of the flagship brand from 9.7% in 2008 to its current 14% market share. That share has to come from somewhere, and certainly some of it is coming from Marlboro.
Another engine for growth could come from e-cigarettes, which are electronic cigarettes. This may seem like a gimmick to some, and I thought the same until recently. I now personally see four people in my department at work use these things on a daily basis, and I have less than 50 people in my department. Lorillard purchased blu e-cigs for $135 million earlier this year, a drop in the bucket for a company with a $15 billion market cap. As health conscious smokers look for alternate ways to smoke or try to get around smoking bans, these products may provide a great solution. I see my co-workers actually using these products inside, so they they really love these products. LO is the first major cigarette manufacturer here in the U.S. to enter this space.
LO introduced a quarterly dividend of $0.92 in 2008 when they first became a publicly traded company and currently pays a quarterly dividend of $1.55. So, LO has grown its dividend by 68.4% in four years! LO targets a payout ratio of 70-75%, and plans to expand EPS through the growth engines listed above as well as an aggressive share buyback policy. This is a very shareholder friendly company, as most tobacco companies are. It's currently trading for a P/E ratio of 14.13, which is less than both PM and MO - my two other tobacco holdings, and the most attractive companies in this space.
The main headwinds for LO appears to be stricter regulation on their products, including possible FDA action on menthol, and the lack of international sales. I find the latter more important than the former, but there is still a market here in the U.S., even if it's matured. Someone has to sell these products to Americans, and MO and LO are both doing fantastic jobs in different, but competing, areas of the market. Overall, I much prefer companies with a global footprint like Johnson & Johnson (NYSE:JNJ), PepsiCo (NYSE:PEP) and Philip Morris International (NYSE:PM) and because of that LO will likely be a smaller position for me. The larger the market, and the more consumers a company can serve, the larger the economies of scale become.
For anyone interested in LO I would encourage you to take a look at the last annual report.
This purchase will add $124.00 to my annual dividend total based on the current dividend payout.
With this purchase I now have 29 positions in my portfolio again.
Some analyst opinions on my recent purchase:
*Morningstar currently rates LO as a 3/5 star valuation.
*S&P currently rates LO as a 4/5 star Buy.
I'll update my Freedom Fund in early November to reflect my recent addition.
Full Disclosure: Long LO, MO, PM, KO, JNJ, PEP
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