Tobacco Company Dividends Hold Investors in Line (LO, MO, RAI, PM, VGR)

Some of the highest dividend yields from any sector come from tobacco stocks. That’s why a relatively weak report from one of the cigarette makers gives pause to investors looking for a safe place to make some profits. Today’s report from Lorillard, Inc. (NYSE: LO) was, in fact, one of those weak reports and the question is whether weak earnings will dampen enthusiasm for this high-dividend sector.

Lorillard’s introduced a non-menthol Newport product during the quarter, in an effort to extend its best-selling Newport menthol cigarettes and also saw solid retail sales growth in its low-priced Maverick brand. But the lukewarm results are a function of lower wholesale sales even though retail sales improved. The company also got hit with higher costs related to litigation settlement agreements and federal requirements.

The company posted EPS of $1.94 on revenue of $1.62 billion. The consensus estimate called for EPS of $2.03 on $1.14 billion. Gross profit fell year-over-year from 36.1% to 34.7%. To make up for the profit shortfall, the company announced a new $750 million share buyback following a $1.4 billion buyback that was completed in August. The company has about $550 million remaining in the new share repurchase program.

In the first 45 minutes of trading this morning, Lorillard’s shares are down about -4.9%, and while volume is heavier than usual, it is not dazzlingly so. The company’s average daily volume is just less than 2 million shares out of more than 138 million shares outstanding. Almost 97% of the shares are held by institutional investors, who are quite happy with the stock’s yield and less interested in a rising share price. By way of comparison, institutional investors hold about 71% of Philip Morris shares, about 61% of Altria shares, about 46% of Reynolds’ shares, and just under 28% of VGR’s shares.

Given the relatively low turnover in Lorillard’s shares today, one might reasonably conclude that the institutional investors are still satisfied with the dividend and with the company’s new share repurchase program. For institutional investors, tobacco companies’ high dividends are worth holding on for.

With the exception of Philip Morris, the other tobacco company stocks are trading lower today as well, though volumes are not out of the ordinary. Philip Morris shares are up a bit — 0.10% — likely due to a strong report from India’s ITC Ltd., the largest cigarette maker in that country.

Lorillard’s shares are off -4.9%, at $109.98, in a 52-week range of $72.40-$120.00. Altria’s shares are off -0.55%, at $27.30, in a 52-week range of $23.20-$28.14. Reynolds American shares are off -1.66%, at $39.07, in a 52-week range of $19.50-$39.77. VGR shares are off -0.74%, at $17.39, in a 52-week range of $15.37-$19.28.

Paul Ausick