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We reaffirm our Neutral recommendation on Lorillard Inc (LO - Analyst Report) following an appraisal of its fourth quarter 2012 results.

Why the Reiteration?

Lorillard’s fourth quarter earnings of 79 cents per share exceeded the prior-year earnings by 8.2% and the Zacks Consensus Estimate by 3.9%. The results benefited from top-line growth, lower share count owing to the company’s share buyback program and favorable tax rates.

Net sales of $1.70 billion surpassed the Zacks Consensus Estimate and went up 5.3% from the prior year on the back of increased revenues from its cigarettes and electronic cigarettes segments.

We are encouraged by the company’s dominant share in the cigarettes market with the rising popularity of its Newport and Maverick brands, despite slowdown in the cigarette industry. Lorillard’s Newport brand has been able to increase its domestic market share since 2009, even with higher cigarette pricing. The brand name has thus enabled the company to charge premium prices, resulting in profitability.

Moreover, Lorillard is adapting to changing consumer demands by investing in less-hazardous alternatives for tobacco with the acquisition of blu e-Cigs brand. With the acquisition of blu e-Cigs in Apr 2012, the company forayed into the developing and profitable electronic cigarette market. In addition, blu e-Cigs look like traditional cigarettes but do not produce tobacco smoke, ash or smell, encouraging consumers to switch to electronic cigarettes to quit smoking.

In addition, Lorillard is one of the most efficient and aggressive companies in the tobacco industry that regularly increases shareholder return through dividend and share repurchase activities. The company has rewarded its shareholders and increased dividend payment every year. Over the long term, Lorillard expects to return approximately 70-75% of its earnings to shareholders in the form of dividends.

Lorillard holds a Zacks Rank #2 (Buy). Other cigarette company which is worth considering is Altria Group Inc. (MO - Analyst Report). Other consumer staples stocks that warrant a look are Flower Foods Inc (FLO - Snapshot Report) and Kellogg Co. (K - Analyst Report). While Flower Foods holds a Zacks Rank #1 (Strong Buy), Kellogg and Altria carry a Zacks Rank #2 (Buy).

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