Up In Smoke

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).  Analysts say Lorillard has a strong growth outlook due to the strength of its Newport cigarette brand, which Barron’s notes, “is popular with black and Hispanic smokers, particularly in the Northeast.”

Some 93% of Lorillard’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 “Newport” is sometimes used among black smokers as a substitute for the word “cigarette”–the way some people say, “Hand me a Kleenex,” when they mean “tissue”. In any case, Newport is the second-best-selling brand in the U.S. behind Phillip Morris’s Marlboro.

Even if Lorillard doesn’t get acquired, Barron’s claims Lorillard looks like a good investment. “Its shares trade at 11 times projected 2009 profit of $5.50 a share and provide a yield of 6%,” according to the financial weekly. “Lorillard 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.” Barron’s concludes that Lorillard should be trading about 30% higher than it’s recent price of around $62.

As an investment, even with all its potential upside, I wouldn’t touch Lorillard. I can’t say

that I apply strict socially conscious guidelines to all my investments. But, consider this: According to a 2008 report on cigarette marketing to blacks from the Campaign for Tobacco Free Kids, “nearly 80%of all smokers start before the age of 18 and, not surprisingly, the vast majority of kids smoke the three most heavily advertised brands. One of these heavily advertised brands, Newport, is the cigarette brand leader among African-American youths in the United States. Eight out of every ten black, youth smokers smoke Newport cigarettes.”

While blacks don’t smoke in larger proportions than the general U.S. population, they do suffer disproportionately from health complications brought on by smoking. In a case like this, where a company relies on a single product that potentially wreaks such harm on African American health, I’m not buying shares.  I’m not sure I would invest in any cigarette company, for that matter. Would you?

Where do you draw the line? Do you leave your social or political beliefs out of investment decisions?