You would think a company like Vector Group Ltd (NYSE:VGR) would be perfectly set up to benefit from consumers’ desire for cheaper cigarettes with its discount brands. While partially true, discount cigarettes come with lower margins, meaning Vector needs to work twice as hard to make as much as its considerably larger peers. To top this off, its dividend and overall financial health could be in serious jeopardy if one of the many lawsuits against the sector results in a huge fine. Vector Group Ltd (NYSE:VGR) is just a fraction the size of Altria or Reynolds American, so it comes with its own set of risks.
Similarly, Altria and Reynolds American are working their balance sheet magic by reducing headcount (and thus expenses) and rebuying stock to make it appear as if the company is delivering top-line growth. With Lorillard you aren’t going to find layoffs. Instead, you’ll find a company that’s delivered consistent market share gains for a decade now that’s doing its best to reward shareholders through share buybacks and sizable dividend increases.
In May, Lorillard Inc. (NYSE:LO) doubled its share repurchase allotment by authorizing the purchase of an additional $500 million worth of shares. Keep in mind, this comes on top of the $390 million it spent in the third and fourth quarters of 2012 combined, and the $149 million in the first quarter, on share buybacks. Share buybacks aren’t an instant payment to shareholders, but it does help make a company appear cheaper on a P/E basis, which can occasionally help push the share price higher.
Where Lorillard is really making an impact is with its growing dividend. Despite being spun off just five years ago from property and casualty insurer Loews, Lorillard has already kicked in five straight years of payout increases to shareholders — with its most recent increase being a 6.5% boost in February — totaling a cumulative 79% increase on a quarterly basis since it instituted a quarterly payout in 2008.
Source: Nasdaq.com.
*Assumes quarterly payout of $0.55 through remainder of 2013.
The current yield on Lorillard is a delectable 5% and puts it at nearly double the current yield of a 10-year Treasury note. Another way to think about this is that with these dividends reinvested back into the company’s stock, you’d double your money on payouts alone in less than 15 years! At a payout ratio of 70.5% based on this year’s projected EPS, Lorillard is striking a great balance with investors of paying out a sizable chunk of its profits while also ensuring that its dividend has a little downside buffer, should demand weaken.
Foolish roundup
Sometimes the best hidden gems are found in sectors that have the most questionable long-term outlooks. Having cornered a good chunk of the menthol cigarette market share, Lorillard should be able to mount growing market-share gains and significant pricing power in comparison with Altria’s Marlboro, which is fighting for its life to keep its current market share. With a rich history of shareholder incentives ranging from share buybacks to rising dividends, there’s little reason to believe Lorillard Inc. (NYSE:LO) won’t be a pillar of strength in the U.S. tobacco industry for investors for years to come.
The article 1 Great Dividend You Can Buy Right Now originally appeared on Fool.com and is written by Sean Williams.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of, and recommends, Loews. It also owns shares of Philip Morris International.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
