Why Lorillard's Stock Is up Over 20% in 2014

Lorillard (NYSE: LO.DL  ) has put in an impressive year-to-date performance. The company's shares have jumped just over 21% since the beginning of the year, outperforming the wider S&P 500 by nearly 15% --  excluding dividends.

However, as we roll into the second half of the year, will Lorillard's outperformance continue?

A strong performance
Lorillard's strong performance so far this year stems from two factors. Firstly, the company has been the subject of bid rumors. The rumors claim that larger peer Reynolds American (NYSE: RAI  ) is putting together a deal to buy out its smaller peer.

Secondly, Lorillard's performance has been boosted by strength across the tobacco sector. Yield-starved investors look to tobacco stocks for their hefty dividend yields to generate income for their portfolios. 

Indeed, Lorillard's peers Reynolds and Altria have both seen their shares jump this year as investors seek out yield in the market.

Reynolds and Altria have added on 21% and 10% year to date respectively -- excluding dividends.

Still, Lorillard's proposed deal with Reynolds is what's really putting a rocket under the company's stock right now.

Merger mania
According to sources with knowledge of the matter, Reynolds is in "active discussions" to acquire Lorillard in a complicated three-way transaction. However, this deal will not be as simple as it first appears .

For starters, if Reynolds-Lorillard combined the US domestic tobacco market would be dominated by two companies, Altria and Reynolds-Lorillard. This is bound to attract the attention of antitrust regulators.

So Reynolds will likely have to sell off some non-core brands to reduce its dominance over the market. Luckily, divestment of non-core brands is exactly what Reynolds has been trying to do over the past few years so this would work well with its core strategy. The remaining brand portfolio would center on Reynolds' Camel and Lorillard's Newport brands.

Rumors also claim that the UK's Imperial Tobacco has plans in place to acquire Reynolds' unwanted brands.

Still, the companies must navigate around another issue, Reynolds' majority shareholder British American Tobacco.

Anglo-American owner
British American owns around 42% of Reynolds, which it acquired a decade ago. For the past ten years it has agreed not to interfere in Reynolds' business. Nevertheless, due to the size of the Lorillard deal and Reynolds' already stretched balance sheet, Reynolds plans to use its own stock to pay for part of the deal. As a result, British American's holding would decrease if the merger goes through.

The British giant is unlikely to be happy with a deal in which it loses out. As a result, speculators argue that British American would either fund the deal or just acquire Reynolds.

Still, the deal is by no means set in stone just yet and it contains many moving pieces. It could all fall through.

Foolish summary
In conclusion, over the past six months Lorillard's shares have jumped 20%, outperforming the wider market. The company has outperformed due to bid interest but the deal's three parties remain in discussion and as of yet, no deal is on the table. Unfortunately, this means that Lorillard's share price could fall back to earth if the deal falls through.

At present, Lorillard is trading at a historic P/E of 20.2 compared to its five-year historic average of 14. If the deal falls through it is reasonable to assume that Lorillard's share price could fall back to its historic valuation -- 25% below current levels .

Top dividend stocks for the next decade
The smartest investors know that dividend stocks, like Lorillard, simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (0) | 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.

Be the first one to comment on this article.

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: 3017493, ~/Articles/ArticleHandler.aspx, 8/28/2015 11:06:21 PM

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...

Rupert Hargreaves

Rupert has been writing for the Motley Fool since December 2012. He primarily covers tobacco and resource companies with a passion for value-oriented investments. .

Today's Market

updated 1 hour ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/27/2015 11:19 AM
BTAFF $53.35 Down +0.00 +0.00%
ITYBY $96.96 Up +0.16 +0.17%
Imperial Tobacco G… CAPS Rating: **
LO.DL $0.00 Down +0.00 +0.00%
Lorillard, Inc. CAPS Rating: ****
MO $54.17 Up +0.46 +0.86%
Altria Group, Inc. CAPS Rating: ****
RAI $84.67 Up +0.19 +0.22%
Reynolds American,… CAPS Rating: ****