Recent Buy

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 (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 (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 (JNJ), PepsiCo (PEP) and Philip Morris International (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

Thanks for reading.

Comments

  1. says

    Nice buy! The dividend yield is really good when compare to PM. I also did some shopping today and picked up more MSFT and CAT. UTX, GD and CHRW seem like good buys if they pull back a bit further. Cheers!

    • says

      Henry,

      The yield is strong, but I took a full month to look at this one before I felt comfortable enough to buy. So, in that regard I wasn’t just chasing the yield…however I did want something with a strong yield to make up for the loss of Total.

      I agree with your picks there. All very strong plays and I am definitely interested in adding to my GD position and eventually initiating a position with UTX. Both very strong companies. I’ll have to look at MSFT again. CAT is a great industrial company and its cyclical nature is showing itself right now.

      Best regards!

  2. says

    Congrats on the new purchase! Wow, 5.34% yield, that’s exceptionally high.

    The market is starting to look a bit attractive. Just waiting for one or two more bad earnings reports ;)

    Happy hunting!

    • says

      FI Fighter,

      Yes, the yield is pretty high with this one. Not as high as MO, but the valuation is lower and that’s ultimately what I care most about. You can say that MO is a better company, but I like to hedge my bets. This is how I do that. Same with KO and PEP or COP and CVX.

      I agree with you on the market becoming more attractive. I hope it continues right into November. I have a little capital left to maybe make another purchase after this buy and another buy I’m going to publish soon, but I’d rather wait until November when I really have some capital ready.

      Best wishes.

    • says

      PIP,

      Yeah, the e-cig is an interesting product. Seeing as how I’m noticing them being used indoors makes them particularly interesting. We’ll see where this goes, but if nothing else it’s a segment that I’d like to be involved in and Lo gives me that opportunity. I like to cast my net far and wide.

      I’m also worried about the lack of international exposure. That’s usually what keeps me from investing in a company. But, there is still a large market for U.S. smokers, and someone has to service those consumers. May as well profit in that, I say.

      Best wishes!

    • says

      Drizzt,

      “All work and no play makes Jack a dull boy”.

      Although I’m kidding a bit with that, there is some truth. There has to be some fun in life, besides work and bills and responsibilities, and usually the “fun” comes in the way of things that are bad for you. Even I really love my soda and definitely look forward to drinking a Coke or Mountain Dew after a long hard day at work. Some people crave a cigarette or a beer in that same way. Different strokes for different folks. I’m not judging, but I’ll surely participate in the businesses that serve all these consumers.

      Take care!

  3. says

    Nice purchase! I’ve also been watching LO lately, although I don’t currently have plans to initiate a position. However, I did make a couple of purchases today, which I just finished writing about on my blog.

    • says

      DGM,

      Thanks for stopping by. I’ll have to stop by your blog here in a few minutes and check out your purchases.

      With LO, it replaces the yield I was getting with TOT, but with greater growth prospects and a friendlier shareholder policy. We’ll see how that trade works out.

      Best wishes!

  4. says

    I always enjoy reading your progresses, and thanks for sharing them DM!

    Yes. With LO there are a number of good things. Firstly, of course, the growth in EPS and dividends. You can’t argue with that.

    I personally like the fact that Mavericks grew so much last year, which is a good cheap cigarette for the recession generation. I also really enjoy that the company is marketing the reds heavily, just in case the menthols get banned (which seems unlikely at this point, but you never know). They are proactively addressing the issues, which is admirable.

    The e-cigs are the cherry on top, indeed. I see folks with them around a lot as well.

    As far as the morality, if people wouldn’t smoke, they’d be taking xanax or zoloft or vicodin or whatever. If people didn’t have that stuff, they would probably hit themselves over the head with a baseball bat. People need things to do with themselves, sometimes destructive, sometimes not. Me, I smoked for ten years. I quit five years ago. Now I prefer yoga. But I pass people smoking all the time in the street. Smoke em if you got em, we get paid.

    • says

      Joe,

      Great points. LO is marketing away from menthols, as those are already a strong brand with a solid, and growing, market share. They are effectively pricing their other brands, including the reds and discount brands. It seems to be working.

      I agree with you on the morality points. Unfortunately, in life a lot of things that are fun, or make you feel good or taste good tend to have negative effects or are unhealthy. I say live and let live. Just my take on it.

      Best wishes!

    • says

      Compounding Income,

      Haha. I think we’re all on the same wavelength here. All the major well-known dividend growth stocks, especially your consumer stocks, are fairly pricey right now…so that’s forcing us to look in different directions for attractive opportunities.

      Hopefully our intuition and research serves us well!

      Take care.

  5. Dividend Dude says

    Hi DM,

    What do you think about INTC right now? I’m looking to pick some up around $21.

    Best,
    Dividend Dude

    • says

      Dividend Dude,

      I really like INTC at these prices. It’s trading for about 10% or so below my cost basis, so obviously I’d love to pick up more right now. It’s simply already a fairly large position for me so it’s just not prudent for me to add much to it right now. If it stays low priced for a few months I’ll likely revisit this name and pick up some more.

      Best wishes.

    • says

      jlcollinsnh,

      I looked at RAI a few times. I found it to be higher priced than LO, with lower growth. Although it had a slightly higher yield, it also had a much higher payout ratio. More important, however, was the fact that I just didn’t like their brands as much. I much prefer the strength of Marlboro and Newport in the portfolio. LO does have its risks, however, and the menthol risk is probably at the top of that list.

      Best wishes!

    • says

      Marvin,

      Yeah, I believe LO would make a nice compliment to MO as I own both as well. I like hedging my bets and owning both. My favorite play here is PM, but as my largest holding I need to diversify away from it. I don’t know if tobacco will still be a good investment 20-30 years from now with regulation and health issues, but I think it’s good for the next 5-10 years. It’s always good to keep an eye on things. Buy and monitor!

      Best wishes.

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