This is chapter six of how to not wake up broke in your 80s… own companies with good dividends, with long histories of increasing their dividends and that have the ability to bounce back from bad news.
Lorillard (NYSE: LO), the cigarette maker, is a perfect example of what to own. You may not like cigarettes – I don’t – but this is something you should own.
Lorillard got what should have been devastating news from the government. The FDA is threatening to hit them hard over their biggest selling product, Newport menthol cigarettes.
It seems the FDA has just figured out that menthol cigarettes are the worst of all smokes.
The stock dropped on the news to a discount to the other big cigarette makers. It had historically sold at a premium to the others.
Lorillard’s response to the news? Buy the electronic cigarette manufacturer blu Cigs. The market reacted by driving its share price up 24%.
Electronic cigarettes are unknown to most people. I have seen only a few people using them. But this new gadget is expected to outsell all conventional cigarettes in as soon as the next decade.
They account for about 3.4% of Lorillard’s revenues now. But sales increased 350% year over year and the company now has a 50% market share.
Lorillard has also introduced a non-menthol cigarette to fill the spot Newport has held in the event the FDA bans them.
No one knows yet how hard the FDA will come down on menthol cigarettes, if at all. This may turn out to be a non-event. But the steps Lorillard has taken in e-cigarettes has already negated much of any possible negative outcome.
Lorillard pays a 4.2% dividend, has shown remarkable strength in spite of the government’s efforts to crush the cigarette industry, and has moved into the highest margin area of cigarettes – the fastest growing area in the cigarette industry – and has a 50% market share of it.
This is an excellent lesson about how to run a business – and how to not wake up broke in your 80s.