01/21/2014 8:00 am EST
We know that buying stock in a tobacco company is not for everyone, cautions David Fried, editor of The Buyback Letter. Nevertheless, he considers this tobacco play his favorite income idea for 2014.
The performance and dividend of Lorillard (LO) is something that you need to know about! Indeed, if I could only buy one stock for dividend income, this would be it.
Lorillard is the third largest manufacturer of cigarettes in the US; Newport is its flagship brand. Founded in 1760, Lorillard is the oldest continuously operating tobacco company in the US.
In addition, in April 2012, the company acquired bluecigs, the top-selling electronic cigarette company in the United States.
Lorillard's US market share has increased for ten straight years, to over 14% in 2012, from less than 9% in 2002. Management has hiked the dividend every single year since going public, raising it an average of 12% a year.
It also returned money to shareholders by buying back shares, taking a quarter of the shares off the market in the past five years.
The company has over $2 billion in cash and another $1 billion in cash flow annually. This cash will enable the company to continue to buyback stock and raise dividends in the future, if they so desire.
The company started paying a quarterly dividend in August 2008 of $0.30667 per share. Since then, quarterly dividends have grown an average of about 12.4% a year, as have earnings. LO targets a payout ratio of about 70%.
A $500 million share repurchase program was announced on March 8, 2013; then, in May, Lorillard's Board of Directors amended the program to authorize an additional $500 million in repurchases.
The $1 billion would decrease the shares outstanding by about 6.1%. LO has been a great investment since it started trading in 2002.