First Look at Lorillard (LO). Do You Want To See An Ugly Balance Sheet?

Bonds outstanding: $2.5 billion.  Big bonds due in 2016 and 2019-2020.  These bonds will threaten the dividend.


What the company does – With annual sales topping $4 billion in 2010, Lorillard is the third-largest cigarette manufacturer in the United States. Its flagship brand, Newport, claims a 13% share of the total cigarette industry and a 36% share of the menthol category. The firm also competes in the nonmenthol premium category with much smaller brands Kent, True, and Satin and in the discount segment with Old Gold and Maverick.

Morningstar’s take – We think Lorillard possesses a wide economic moat because of the extraordinary strength of Newport, its flagship menthol brand. However, with 90% of its volume generated in the menthol category in 2010 and the threat of Food and Drug Administration regulation still present, the firm could be vulnerable to unfavorable regulatory developments.

Here is a Seeking Alpha article on this risk:

DIVIDEND RECORD – Lorillard started paying dividends in 2008.  Its dividends have grown from $0.46 in 2008 to $1.55 in 1Q 2012.

Dividend: $1.55 quarterly

Dividend yield: 5.1% ($6.20 annual dividend / $121.77 share price)

Dividend payout ratio: 77.5% using recent reported EPS for 2011 OR 86% using the average adjusted earning power per share of $7.20


EARNING POWER – $7.20 per share at 132 million shares.  The inept management has been buying back shares and issuing debts which is destroying the balance sheet.

(Earnings adjusted for changes in capitalization; Lorillard has been buying back shares since 2008)


Net income


Adjusted EPS



$826 M

174 M




$898 M

174 M




$887 M

172 M




$948 M

165 M




$1,029 M

152 M




$1,116 M

132 M



Net income


Adjusted EPS

2011 Q1


$248 M

145 M


2011 Q2


$291 M

142 M


2011 Q3


$267 M

137 M


2011 Q4


$310 M

132 M


2011 total


$1,116 M

132 M


Six year average adjusted earnings per share is $7.20

Consider contrarian buying below $57.60 (8 times average adjusted EPS)

Consider value buying below $86.40 (12 times average adjusted EPS)

Lorillard is currently trading at 16.9 times average adjusted EPS.  This stock is still priced for investment, but it is creeping toward speculative pricing

Consider speculative selling above $144.00 (20 times average adjusted EPS)

BALANCE SHEET – Lorillard has one of the ugliest balance sheets I’ve ever seen outside of financial institutions.  This is how you destroy shareholder equity.  And there is no reason for it either.


Book value per share: ($11.46)

Price to book value ratio: N/A because of negative equity (under 1.0 is good)

Current ratio:  1.73 (over 2.0 is good)

Quick ratio: 1.10 (over 1.0 is good)

Debt to equity ratio: (lower is better) N/A because of negative equity

Percentage of property, plant, and equipment compared to total assets: 8.7%  ($262 M / $3,008 M total assets)

CONCLUSION – Lorillard pays a decent dividend with a yield of 5.1%.  The company’s dividend payout ratio is somewhere in the 77% – 86% range depending on how you calculation and this matches the company’s payout goals according to the most recent earnings conference call.  The stock’s price is still investment quality at only 16.9 times earning power.  So far so good, but then we come to the company’s balance sheet.  It is absolutely horrendous.  There is no reason to buyback share to produce negative share equity.  I’m also disturbed by the small 8.7% percentage of real assets as a percentage of total assets.  I wouldn’t consider buying Lorillard unless the share price dropped down below $60 like they did in 2008 – 2009.  I don’t own companies with negative equity.


DISCLOSURE – I don’t own Lorillard (LO).

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Published in: on February 13, 2012 at 6:03 pm  Leave a Comment  

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