In the last month, shares of Lorillard (LO) have jumped nearly 10% on speculation that the cigarette manufacturer is a possible takeover target of larger tobacco company, Reynolds American Inc. (RAI). Â Analysts say Lorillard has a strong growth outlook due to the strength of its Newport cigarette brand, which Barron’s notes, â€śis popular with black and Hispanic smokers, particularly in the Northeast.â€ť
Some 93% of Lorillardâ€™s revenues come from Newports. The company has the highest profit margins in the U.S. cigarette industry. I asked around, and friends who are smokers and ex-smokers say Newports are so popular among African Americans that the word â€śNewportâ€ť is sometimes used among black smokers as a substitute for the word â€ścigaretteâ€ť–the way some people say, â€śHand me a Kleenex,â€ť when they mean â€śtissueâ€ť. In any case, Newport is the second-best-selling brand in the U.S. behind Phillip Morrisâ€™s Marlboro.
Even if Lorillard doesnâ€™t get acquired, Barronâ€™s claims Lorillard looks like a good investment. â€śIts shares trade at 11 times projected 2009 profit of $5.50 a share and provide a yield of 6%,â€ť according to the financial weekly. â€śLorillard pays out 70% to 75% of its profit in dividends. The company, which was spun off by Loews last year, has a great balance sheet, with more than $1 billion of cash at year end and no debt.â€ť Barronâ€™s concludes that Lorillard should be trading about 30% higher than itâ€™s recent price of around $62.