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JimVanMeerten (58.18)

Lorillard -- Cash cow with growth



May 19, 2011 – Comments (1) | RELATED TICKERS: LO.DL

OK, all you tree huggers, vegans, health nuts and wackos take your best shot.  I live in the Carolinas and just want to bring an investment opportunity to your attention.  This morning I was screening on Barchart for the S&P 500 stocks that were hitting the most frequent new highs in the last month and Lorillard (LO) floated to the top.  I know cream rises to the top and something else floats and sometimes you can't tell the difference.  This stock's steady and current dividend of 5.30% and 18 new highs in the last month cannot be ignored.  The momentum is there.

LORILLARD (LO) is the third largest manufacturer of cigarettes in the United States. Lorillard is the oldest continuously operating tobacco company in the U.S. Newport, Lorillard's flagship brand, is a menthol-flavored premium cigarette brand and the top selling menthol and second largest selling cigarette in the U.S. In addition to Newport, the Lorillard product line has five additional brand families marketed under the Kent', True', Maverick', Old Gold' and Max' brand names. These six brands include 44 different product offerings which vary in price, taste, flavor, length and packaging. Lorillard's manufactures all of its products at its Greensboro, North Carolina facility and maintains its headquarters there.

Factors to consider:

Technical Factors:

1 - 96% Barchart overall technical buy signal

2 - Trend Spotter buy signal

3 - Above its 20, 50 and 100 day moving averages

4 - 18 new highs and up 15.14% in the last month

5 - Relative Strength Index 88.03% and rising

6 - Trades around 113.99 with a 50 day moving average of 98.47

Fundamental Factors:

1 - Tobacco products are cash cows and cannot be ignored by income investors

2 - Wall Street brokerage analysts have released 1 strong buy, 4 buy and 5 hold recommendations for their clients

3 - Sales are projected to increase by 10.30% this year and another 5.10% next year

4 - Earnings increase estimates of 13.30% this year, 9.60% next year and 9.50% annually for the next 5 years

5 - When I see a company paying a 5.30% dividend and sales and earnings projections above 5.00% I feel the dividend is secure

General Investor Sentiment:

1 - On Motley Fool 454 readers venture an opinion on the issue

2 - CAPS members vote 310 to 17 that the stock will beat the market

3 - The more experienced All Stars also vote in the same direction with a 120 to 7 vote

Summary:  If you have moral issues about tobacco products ignore this issue but if you want both dividends and growth I think you can look for an 18.5% annual total return over the next 5 years with a buy of Lorillard (LO).

1 Comments – Post Your Own

#1) On May 21, 2011 at 4:12 AM, punkrawkgangsta (< 20) wrote:

LO is overvalued, here's why. Recent spikes in sales have come from a new retail contract that lowers the carton requirement for retailers to get on contract with Lorillard. Traditionally, only Menthol outlets of chain gas stations could get Lorillard contracted, but with the lowering of the standards for a contract, Lorillard was able to "plus out" their key brand along with non-menthol and maverick.

This explains the strong sales for the past month and sales increase this year.

While the new price point will be competitive in these outlets, LO will try to gain share in outlets where it has commanded a small share in the past. This is a great strategy and very agressive and it should be applauded.

However, their growth is anything but sustainable because if they cannot get tobacco consumers to switch to their portfolio, they will be dead in the water. 

Not to mention that although they are trying to diversify, 90% of their business is still menthol, if the FDA clamps down, which we don't think will happen but, who knows, this company is toast.

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