Altria Group Inc (MO), Lorillard Inc. (LO): Is Tobacco Still a Viable Investment?

Much like the previously mentioned companies, Lorillard Inc. (NYSE:LO) also reported a sharp rise in its operating profit from $392 million to $561 million – a 43% rise. This also means its operating profitability sharply increased from 25% in Q1 2012 to 35% in the first quarter of 2013. Lorillard Inc. (NYSE:LO) reduced its state settlement pay by $164 million in the first quarter and projects to cut a total of $205 million in the next five years. Despite this achievement, eight states haven’t joined the settlement yet so this issue will keep looming over these tobacco companies in the coming months.

In the first quarter of 2013, Lorillard Inc. (NYSE:LO)’s revenues from cigarettes decreased by 0.4% (y-o-y). Its fall in revenue was mostly due to the 2.3% drop in volume of cigarettes sold. The drop in net sales was offset by the rise in prices. The company also entered the Electronic cigarettes business. The company reports its market share is around 40% in Electronic cigarettes, but its revenues account for around 3% of its total net sales.

Bottom line

The recent settlements these tobacco companies had with several states helped these companies to expand their profit margins in the first quarter and are likely to persist in the coming years. These companies still face two problems: They need to deal with several other states and reach a settlement with them. The other problem is the ongoing drop in the volume of sales. Even if tobacco companies were to keep raising prices, it won’t keep their revenues from further dropping. Perhaps tapping into new markets such as E-cigarettes might lead these companies to new highs. Until then, these companies’ high profit margins and large dividend payments will keep investors in their corner.

The article Is Tobacco Still a Viable Investment? originally appeared on Fool.com and is written by Lior Cohen.

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