Puff on a Good Dividend - Lorillard (LO)

For all their sins tobacco companies remain some of the most cash generative and generous dividend payers, and for investors who are not sensitive to the "sin" stocks, there is merit in considering them for your portfolio.

Recently America's oldest industry player Lorillard (LO) announced its earnings for the second quarter delivering $1.73 per share versus consensus forecast of $1.61. That’s a 7.4% jump.

Established in 1760, Lorillard (LO) is the third largest manufacturer of cigarettes in the United States. Its key brands include Newport, Kent, True, Maverick, Old Gold and Max brands. Newport is a leading brand of flavored menthol cigarettes and is believed to be the second best-selling cigarette in the US.

As with most tobacco companies, Lorillard (LO) offers investors a dividend yield of just over 5% and trades on a forward price to earnings multiple of around 11 times earnings.

Lorillard (LO) itself has limited dividend history as it was spun off from Loews in 2008. However during that time the company has raised its dividend twice.

The $1.73 in earnings was on the back of net sales of $1.5 billion for the second quarter of 2010 and for the six months to June 2010 the company grew its cash pile from $1.4 billion to $1.8 billion repurchasing approximately 1.8 million shares. On a relative basis, Lorillard (LO) outperformed the industry in each of the first two quarters of this year and achieved record retail market shares for the total brand portfolio, specifically

Newport increased its penetration of the total domestic market as well as the menthol category. While there continue to be pressures exerted on the industry as a consequence of state excise tax increases, continued smoking restrictions, and the nature of the economy, the company plans to continue to apply the same disciplined strategies to operating and improving the business as they have in the past.

This is the dilemma that most investors in tobacco stocks face. Onerous regulations from the likes of the Food and Drug Administration (FDA) as well as heavy pressure from society and consumer groups continue to cast the "sin" net over them. In saying that, for investors who appreciate the value of high dividend yielding stocks, Lorillard (LO) offers access to premium brands in the US as well as strong cash flows and could well be considered by investors who care less about smoke and more about stable dividend income.