Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn’t sustainable. In others, the dividend is so low, it’s not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we’re going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn’t to say that these stocks don’t share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week’s selection.
This week, I’m going to dip into a sector I normally scream avoidance over and rile a few socially responsible investors in the process by recommending investors embrace U.S. tobacco producer Lorillard Inc. (NYSE:LO).
Getting to the butt of the problem
If I were to list all of the concerns that Big Tobacco is facing in the United States, we’d be here all day. But, if I could narrow it down to the two biggest problems the sector is facing, it’d be increased educational awareness with regard to the dangerous effects of smoking, which has reduced the number of new and current smokers, and new laws and taxes being implemented and suggested to discourage smoking.
The effort to reduce the appeal of smoking has been swift and direct. The Centers for Disease Control and Prevention launched a three-month, $54 million multimedia graphic ad campaign last year targeted at getting 50,000 young adults to quit. The Food and Drug Administration is doing its part as well in petitioning tobacco companies to supply it with quantity levels of some 20 disease-causing agents in cigarettes, which it then hopes to make public to further increase smoking danger awareness.
Source: Centers for Disease Control and Prevention.
The end result of these multiple actions has been an ongoing reduction in smoking rates over the past four decades and tougher times for U.S. tobacco producers such as Altria Group Inc (NYSE:MO) and Reynolds American, Inc. (NYSE:RAI). In fact, a tough domestic sales climate was one reason Altria decided to spin off its overseas operations into Philip Morris International Inc. (NYSE:PM) in 2008. By separating its business, the hope was that investors would have a better understanding of the fundamental forces driving Altria and Philip Morris International Inc. (NYSE:PM).
It still hasn’t been easy for U.S. big tobacco. In fact, Altria Group Inc (NYSE:MO) has shed 15% of its U.S. workforce, and Reynolds American, Inc. (NYSE:RAI) 10%, because of declining cigarette volumes and the need to reduce expenses to keep profits (and dividends) up.
Lorillard is smoking its competition
Lorillard Inc. (NYSE:LO)’s advantage over its peers can be traced to its outperformance in premium, discount, and e-cigarette products.
Source: Dennis Skley, Flickr.
There’s no sugarcoating that cigarette volumes are falling in the United States. In the first quarter, Lorillard Inc. (NYSE:LO) delivered a 1.3% decline in sales of its premium Newport brand compared with the previous year. However, all things considered, this was much better than the 6.2% decline in overall domestic cigarette shipments for the industry as a whole. Furthermore, Lorillard was able to use its solid pricing power to help profits in this segment rise by nearly double digits on a non-GAAP basis while further improving its premium market share by 0.5% to 12.7%. As Altria’s premium Marlboro brand struggles to maintain its market share, Newport continues to reap the benefits.
But, it isn’t just Lorillard’s premium brands that are doing the talking! Lorillard Inc. (NYSE:LO)’s discount brands, such as Maverick and Old Gold, are giving discount-only brand Vector Group Ltd (NYSE:VGR), as well as traditionally bigger tobacco producers Altria Group Inc (NYSE:MO) and Reynolds American, Inc. (NYSE:RAI) a run for their money. This helped push Lorillard’s overall cigarette market share up 0.4% year over year to 14.9%. Not surprisingly, Lorillard has delivered market share increases in each of the past 10 years!
Lorillard Inc. (NYSE:LO) is also taking advantage of smokers’ addiction with regard to e-cigarettes, a new product designed to release vapor instead of smoke, which is far healthier for the user and his or her surrounding family and friends. In the first quarter, Lorillard Inc. (NYSE:LO)’s blu e-Cigs delivered $57 million in revenue.
Show me the money, Lorillard
It’s not hard to come by a dividend in the tobacco sector, but finding a company with an expanding bottom line that has a sustainable payout is far from easy.
