Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Philip Morris International Inc. (PM), Reynolds American, Inc. (RAI), Lorillard Inc. (LO): Earnings Yield and Evaluating Tobacco Buybacks Funded With Debt

Using the above methodology, Reynolds American, Inc. (NYSE:RAI) will earn $1.65 billion in 2014 when the buyback ends in mid-2014 (started Nov 2011), or $3.11 per share – a gain of 29.6%; but without the buyback the company would only earn $2.84 per share – a gain of 18% from current levels.

The little guy

Lastly, let’s take a look at Lorillard Inc. (NYSE:LO), which is undertaking the smallest buyback in the group but has achieved some of the best returns from these buybacks during the past few years–will this continue?

Lorillard Inc. (NYSE:LO)’s most recent buyback program is worth $1 billion and was announced on March 8 this year.

Before Buyback
Share price $42.25
EPS $2.69
Earnings Yield 4.9%
After tax cost of borrowing 2%
Number of outstanding shares 390,190,000
Planned buybacks $1 billion @ 23,668,669

Lorillard has issued a tranche of $500 million in debt to fund the first half of its buyback, and I believe that it will issue a further $500 million to finance the second part. Amazingly, Lorillard Inc. (NYSE:LO) is only paying an average of 2% to borrow this amount – lower than many governments around the world.

With an earnings yield of just under 5%, and such a low interest rate, Lorillard Inc. (NYSE:LO) will achieve a good return for investors.

After Buyback
Earnings after borrowing cost $1,050,000,000
Shares outstanding 366,521,331
EPS $2.87

Lorillard Inc. (NYSE:LO)’s earrings have remained almost constant for the past few years, and assuming this trend continues, the company will earn $2.87 per share after the completion of its planned buyback.

On completion of its buyback, Lorillard Inc. (NYSE:LO) will have bought back 6% of its total number of shares in issue, driving up earnings-per-share by 7% assuming income remains constant, an impressive rate of growth and a good return for investors on the borrowed cash.

Conclusion

Overall, these three tobacco giants are all borrowing to buy back stock, but it would appear that their buybacks are actually achieving good returns for investors — despite the cost of borrowing.

However, the best buyback plan belongs to Lorillard, which has achieved the highest returns with the smallest amount of cash.

The article Earnings Yield and Evaluating Tobacco Buybacks Funded With Debt originally appeared on Fool.com and is written by Rupert Hargreaves.

Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool owns shares of Philip Morris International. Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.