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

Lorillard's shares have surged during the first half of 2014 but will this performance continue; it's unlikely.

Jul 3, 2014 at 10:51AM

Lorillard (NYSE:LO) 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.

Rupert Hargreaves owns shares of Altria Group. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers