Lorillard Inc. (LO), Reynolds American, Inc. (RAI): Two Tobacco Companies Worth Owning

Other leading tobacco companies also offer high dividend yields: Altria pays $1.76 per share per year, which comes to an annual yield of 4.8%, Reynolds offers a yearly dividend of $2.52 per share, which is an annual yield of 5%.

Valuation

Let’s also take a closer look at these companies’ enterprise value and their EV to EBIT ratio to get a better understanding of these companies’ valuation. The table below presents the summery of data of all three companies and the average tobacco industry.

This type of valuation accounts for differences in financial structure of these companies. The yearly EBIT is based on the past four quarters (ending in the first quarter of 2013). As seen, Lorillard Inc. (NYSE:LO)’s EV to EBIT ratio is the lowest at 8.9, which is also lower than the industry average. On the other hand, Altria’s EV/EBIT is slightly higher than the industry average. Reynolds has the same EV/EBIT the industry has. These findings suggest, at face value, Lorillard’s current value is relatively low for the tobacco industry while Altria’s is slightly high.

Bottom line

Lorillard Inc. (NYSE:LO) and Reynolds American, Inc. (NYSE:RAI) offer interesting investment opportunities and even though the demand for cigarettes continue to dwindle, the growing e-cigarette industry could slowly pull back up their revenues. Finally, these companies’ current valuations, rise in profit margins and high dividend yields makes these tobacco companies still a viable investment.

The article Two Tobacco Companies Worth Owning originally appeared on Fool.com and is written by Lior Cohen.

Lior Cohen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Lior is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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