Cigarette maker Lorillard Inc. ( LO - Analyst Report ) delivered fourth quarter 2012 adjusted earnings of 79 cents per share, which exceeded the prior-year quarterly earnings of 73 cents by 8.2%. The company’s earnings also exceeded the Zacks Consensus Estimate of 76 cents per share.

The results benefited from top-line growth, a lower share count owing to the company’s buyback program, and favorable tax rates, partially offset by higher interest expenses.

Net sales in the reported quarter went up 5.3% year over year to $1.70 billion on the back of increased sales in both of its segments -- cigarettes and electronic cigarettes. Revenues surpassed the Zacks Consensus Estimate of $1.17 billion.

Segment Details

Cigarettes: Net sales of the cigarette segment increased 2.9% to $1.67 billion, driven by higher average cigarette selling prices and unit sales volume. Total wholesale cigarette volumes increased 0.3% to 10 billion units in the fourth quarter including Puerto Rico and U.S. shipments.

In the reported quarter, Lorillard's domestic retail market share climbed 0.2 share points to 14.2%, whereas domestic retail market share of the company’s flagship brand Newport jumped 0.2 share points to 11.9% in the fourth quarter, driven by increased promotional activity.

Adjusted gross profit increased 1.1% to $620 million, driven by higher sales offset by higher raw material costs. Adjusted operating profit increased $2 million to $507 million in the quarter.

Electronic Cigarettes: blu eCigs came into operations in this quarter, thus forming a new segment. The segment contributed $39 million to Lorillard's total net sales in the fourth quarter, almost three times the level of the prior quarter, driven by higher blu eCigs sales achieved from marketing and expanded retail distribution. blu eCigs domestic retail market share was over 30% of the electronic cigarettes market.

Gross profit was $16 million in the fourth quarter of 2012 while adjusted operating income totaled $7 million.

Full Year 2012 Results

In 2012, Lorillard’s adjusted earnings of $2.82 per share exceeded the prior-year quarterly earnings of $2.63 by 7.2% and the Zacks Consensus Estimate of $2.79 by 1.1%. The results benefited from top-line growth and increased retail market share of cigarettes.

Net sales in the year went up 2.4% year over year to $6.62 billion on the back of increased sales in both of its segments - cigarettes and electronic cigarettes.

Other Financial Update

Lorillard’s board declared a quarterly dividend hike of 6.5% on its shares to 55 cents per share. The dividend will be paid on Mar 11, 2013 to stockholders of record as of Mar 1, 2013. The company paid its last dividend of 52 cents in Dec, 2012.

Apart from this, in Nov, 2012, the company’s board approved a three-for-one split of Lorillard common stock, which it distributed in the form of a 200% stock dividend. The additional shares were distributed on Jan 15, 2013.

The company also repurchased approximately 7.8 million shares for $304 million under its share repurchase program in the quarter.

Our Take

Overall, we are encouraged by the company’s dominant share in the market with rising popularity of its premium brand Newport and value brand Maverick. Moreover, it is adapting to changing consumer demands by investing in less-hazardous alternatives for tobacco with the acquisition of blu eCigs and developing electronic cigarettes.

However, stiff competition in the domestic cigarette market, various taxes, numerous legal regulations and proceedings make the stock volatile. Currently, Lorillard has a Zacks Rank #3 (Hold).

Other stocks in the consumer staples sector worth a look are Green Mountain Coffee Roasters Inc ( GMCR - Analyst Report ) , H. J. Heinz Co ( HNZ - Analyst Report ) and Altria Group Inc ( MO - Analyst Report ) . While Green Mountain carries a Zacks Rank #1 (Strong Buy), Heinz and Altria hold a Zacks Rank #2 (Buy).