Is Lorillard the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Lorillard (NYSE: LO  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Lorillard.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-year annual revenue growth > 15% 7% Fail
  1-year revenue growth > 12% 10% Fail
Margins Gross margin > 35% 52.4% Pass
  Net margin > 15% 25.4% Pass
Balance sheet Debt to equity < 50% NM NM
  Current ratio > 1.3 2.06 Pass
Opportunities Return on equity > 15% NM NM
Valuation Normalized P/E < 20 13.12 Pass
Dividends Current yield > 2% 5.7% Pass
  5-year dividend growth > 10% 14.8%* Pass
       
  Total Score   6 out of 8

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; Lorillard had negative shareholder equity in the period and therefore fails both tests. Total score = number of passes. *Growth rate since Lorillard started paying a dividend in 2008.

Lorillard comes up with a score of six. Despite a troubling balance sheet with negative equity, the tobacco maker's stock has seen some impressive gains since its 2008 spinoff from Loews (NYSE: L  ) .

Lorillard isn't as well-known a name as rival Altria (NYSE: MO  ) , but smokers are familiar with many of its brand names, which include Newport and Kent. The company has managed to squeeze plenty of profit from its sales, with net margins not only beating Altria's, but crushing those of Vector Group (NYSE: VGR  ) and Reynolds American (NYSE: RAI  ) .

On the other hand, Lorillard's balance sheet has some issues. Despite having more cash than long-term debt, Lorillard has negative shareholder equity, which makes returns on equity and debt-to-equity ratios meaningless. Still, the company's returns on assets and capital are very impressive.

Lorillard has faced controversy over its menthol cigarettes, which the Food and Drug Administration recently reviewed to see if they had greater health dangers than regular cigarettes. Last week, a draft FDA report suggested the answer was no, sending shares soaring.

As a domestic tobacco company, Lorillard will face constant pressure from health regulators and potentially major liability risk -- risk that in part motivated Altria's decision to spin off Philip Morris International (NYSE: PM  ) in 2008. But Lorillard's dividend payouts are very high, and its valuation is reasonable even with the risk. Lorillard isn't perfect, but as long as it avoids major trouble, it should continue to produce attractive returns for investors.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Lorillard to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Philip Morris International is a Motley Fool Global Gains pick. The Fool owns shares of Altria Group and Philip Morris International. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 24, 2011, at 12:21 PM, mm5525 wrote:

    Philip Morris International is the perfect stock, especially in the tobacco space. Lorillard has good brands and a better dividend, but PM has global market dominance. LO is more like MO, not quite the active grower PM is, and thusly must offer a higher dividend since it is a USA-based market, which is declining, and PM has no USA-based exposure, no FDA-worries whatsoever. Interesting to see a report on Bloomberg this morning about methol about a government funded study done by Vanderbilt University courtesy of the Natl Institute of Health that found among 12,000 U.S. smokers that menthol cigs actually have less health risks than non menthol! Apparently you smoke less cigs. Whites smoke 650 less cigs per year than non menthol, blacks 600 less cigs per year than non menthol, and menthol smokers had a 35% less risk of acquiring lung cancer! Finally a lower risk of dying from any lung-cancer-associated death. Looks like the FDA will have some difficulty banning menthol if that study becomes an actual trend. I would still rather own PM than LO or MO and deal with the whims of the USA-based central-planning "do-gooders" of the FDA. I do love virtually all tobacco companies, I just like PM the most out of the lot.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1463734, ~/Articles/ArticleHandler.aspx, 9/20/2014 10:09:21 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement