Lorillard Inc - Growth & Income

Lorillard Inc (LO) recently raised its dividend and is yielding a sizeable 5.5%. It recently became a Zacks #2 Rank (Buy) stock.

Company Description

Lorillard is the third largest cigarette company in the United States. It is also older than the United States, having been founded in 1760. The company is based in Greensboro, North Carolina and has a market cap of $12.4 billion.

It sells cigarettes under six brands: Newport (its flagship), Kent, True, Maverick, Old Gold, and Max. Lorillard was spun off from parent Loews Corporation in 2008.

Second Quarter Results

On July 26, Lorillard announced second quarter earnings per share of $1.73, 12 cents ahead of the Zacks Consensus Estimate. It was the company's third consecutive positive surprise. Earnings were up 1.2% year-over-year.

Sales were essentially flat year-over-year, as higher prices were offset by a decline in sales volume. Gross profit was 52.2% in the quarter, down from 53.4% in 2009. The lower gross profit was primarily a result of higher expenses related to various settlement agreements and fees from the Food and Drug Administration.

Outlook

In its most recent quarterly report, Lorillard stated that it is a defendant in 10,245 product liability cases. Obviously, the company faces many legal and regulatory headwinds. Despite the challenges, analysts are expecting Lorillard to continue to grow earnings per share.

The Zacks Consensus Estimate for 2010 is $6.55 per share, which represents 13.7% growth from 2009. The 2011 estimate is currently $7.14, or 9% higher than 2010 EPS. Lorillard is expected to grow earnings 6.0% per year for the next five years.

Returning Value to Shareholders

Despite paying out several million dollars in various legal fees, Lorillard still has strong enough cash flow to return value to shareholders. The company recently announced a share repurchase agreement for up to $1 billion. The company mentioned the buyback would be funded from existing cash balances. Lorillard has spent $340 million year-to-date buying back shares.

The company also recently raised its quarterly dividend 12.5% to $1.125 per share. Its dividend payout ratio is 65%.

Fundamentals

Lorillard trades at 13.2x trailing earnings, a premium to the industry average of 9.6x. Its net profit margin of 17.1% is higher than the industry average of 6.5%.
 
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