Lorillard is probably the most attractively valued domestic tobacco company stock that investors could buy today. You’ve got a company that is buying back about 15 million shares of stock each year, raising the dividend by a rate around 10%, and the company is using its free cash flow to move into the e-cigarette market. Oh, and the Newport brand, which makes up 87% of the company’s sales, remains remarkably strong. The company trades at a little over 13x earnings, and gives investors a dividend yield over 5%. Any way I run the numbers, it seems that investors should experience total returns of at least 10% annually over the next 5-10 years, and considering that you have a growing 5% yield, it seems reasonable to think that at least half of your total returns will be in the form of cold, hard cash from the dividend.
Take a minute and read this letter in its entirety. I promise you won’t regret it. It is a letter written from Ernest Buffett (Warren’s grandpa) to his son Fred (Warren’s uncle) in 1939:
Dear Fred & Catherine:
Over a period of a good many years I have known a great many people who at some time or another have suffered in various ways simply because they did not have ready cash. I have known people who have had to sacrifice some of their holdings in order to have money that was necessary at that time.
Often enough, you will hear from conventional financial planners that quickly entering and exiting certain stock market investments has the realistic possibility of being a futile endeavor, and usually the explanation “why” simply focuses on the fact that stock market prices are fickle in the short term and can take years and years to correctly reflect the value of the enterprise you have in mind. That’s absolutely part of the equation, but there is more to it than that: almost all of the stock market’s gains come in very short bursts that are wildly unpredictable.