My Cigarette Problem

Okay – I am sure the title fools you, but I thought it may be clever to have one think – what are Bert and Lanny up to now?  Are they okay?  Yes – we are okay and no – we do not have a physical Cigarette problem.  It comes down to the fact that I (Lanny) own both Lorillard (LO) and Phillip Morris (PM).  I have had a discussion with Bert on the right plan of attack with holding Lorillard and PM looking at a very low price point/strong valuation.  Here is the cigarette problem I am facing.

Cigarette Problem

I have owned LO and PM for quite some time now, almost 2 years+ for each stock (not including shares purchased through DRIP).  Last year, Lorillard made an announcement that they will be purchased by Reynolds American (RAI).  Here is the recent article to further finalize more details about the merger/acquisition.  The original announcement was in July 2014 for a purchase price of $50.50 cash and 0.2909 shares of RAI, or approximately a valuation between $69.50-$70.50 based on recent metrics.  I have enjoyed the benefit of a HUGE appreciation over the course of owning Lorillard, they were a strong dividend growth player with plenty of cash.  Recently, they even still announced a 7% dividend increase, that I talked about in my February dividend income results.  I was actually hoping for better, as last year they increased it by approximately 11%, so 7% made me happy, but still led me to think – these guys are yielding in the upper 3% range and have released a 7% yield (combined yield and growth of 11%-ish) – I think there’s a better opportunity out there for me – especially given the share price close at $66.94 on Friday or roughly $3 (i.e. 4.5%) away from the final acquisition price.  This is where the cigarette problem begins to come to fruition.

Enter Phillip Morris

Now – I’ve owned PM, great stock and love it – even though I’m at a net 0% on my position!  Using our dividend stock screener to look at how they currently are standing – I love them right now.  Additionally – fellow bloggers such as MyDividendPipeline (bought them back to back!) and Dividend Maverick.  This is a good cigarette problem I have on my hands – a healthy one at least.  PM is currently trading at $77.65 and is yielding 5.15%.  The P/E Ratio that I calculate currently sits at with prior year EPS of 5.82 = 13.34 or current upcoming estimates from analysts of $4.29 is 18.  Not the worst and not the best and it’s been hard to gauge what to use as the EPS figure – past performance or these analysts expectation… Last year’s dividend growth rate was 6.38% and coupled with it’s current yield is over 11.5%.  Further – I think PM is a better company than RAI and is bigger with, for argument sake, better brands.  I have, as of this writing, around 1 week until their ex dividend date as well to capture their upcoming dividend of $1 for the quarter.  Therefore – growth is roughly the same as Lorillard, but the yield is currently higher with better metrics and obviously my own decision that PM is better than RAI.  Further, as share buy backs are big news for dividend investors, PM’s shares year over year have decreased by 38 million shares or 2.4% – as this further can increase their EPS and allows room for dividend growth.  So I’m merely thinking of trading one cigarette bud for the next.  However, there is now math that is involved with this…

The Cigarette Problem Equation

As you can see above – by selling LO and purchasing PM, I would owe approximately $95.56 in overall taxes BUT I am adding $34.95 to my annual dividend income total or a 29.97% boost from cash invested from LO to PM.  The purchases are including fees of $6.95 for selling and buying as well – so definitely taking the whole picture into account.  I did not include the tax payments/holding the cash from the amount of proceeds, simply because come tax time for 2016, we will really see if I have to owe, etc and $95 isn’t overly material to me (there’s the accountant statement right there!).  What’s interesting – is that this helps me closer reach of one of my 2015 goals set in November & updated based on MDP’s challenge of $6,750 in projected income by end of 2015.  Though $34.95 added isn’t a lot, it is 0.517% of the amount on the annual goal and currently would push me over the $5,300 mark as well.  My cigarette problem here becomes a cigarette solution.

Conclusion

Over the next 7 days this cigarette problem will hopefully be vaporized and that a move will be made.  The more I look at it – I am exchanging my funds for PM in place of RAI shares and cash, as well as taking advantage to what I feel is a good valuation for PM.  Luckily I had a trade I made in the beginning of the year to have net long term capital losses of almost $400 from two small companies I bought 4 years ago when I was naive and am able to take advantage of those to offset these gains.  However, what I am most curious about is you, the readers and the DGI community on what you would do or your thoughts on the situation?  Would you sell LO and buy PM?  Would you keep LO, wait until you have cash and shares exchanged for RAI?  Would you have sold LO and bought something else?  Please let me know, I appreciate the feedback!

-Lanny

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11 thoughts on “My Cigarette Problem

  1. Just chiming in to say I’m currently in the exact same position. Though my stake in LO is one of my smallest I’m not too concerned either way so I may just hang on to them. On the other hand if I sold I would have plenty of money to make a purchase before the PM ex-div date. Sometimes it’s hard to know what to do and often there is no right or wrong answer.

    • Captain Div,

      I agree – it’s hard. I had a decently sized stake with LO (as it grew quite a bit) and honestly, for me – I thought waiting for the ceiling when there was another opportunity in PM was a better bet.. also a great way to add even more dividend income to the portfolio. I’ll have an article here soon on what decision was made. Not a bad spot to be in. Thanks again CD, talk soon!

      -Lanny

  2. Be careful with PM and the forex issues. There could be better opportunities to buy at an even better price in the future. Also, their buybacks were drastically slashed for this upcoming year and with the forex issues these might only get worse. Bill Mauer writes up nice articles on PM over at seeking alpha for information. I too am contemplating the issue you have but I am waiting on PM to add more. I already have a bunch of them and MO is valued too high right now so that basically leaves RAI which is what I am leaning to. We will see how things work out.

    • ADD,

      Thanks for the input and information – I’ll have to check more of his material out. I made a big decision this week and PM was definitely undervalued in comparison to the others at the moment, including LO and RAI. It was a fun move to make, expect that article soon! Let me know what you end up doing a well ADD.

      -Lanny

  3. Good problem to have. I own both LO and PM. I’m continuing to let my Lorillard run for the moment, but I’m watching the announcements closely.

  4. Great article. I am in the same position and I have been thinking about what to do for a while. I am planning on selling my LO stock and putting the money elsewhere. I already own MO and I am going to buy PM in the next few days. I do not want another tobacco stock and I would rather have my LO money in PM or MO.

    I’m selling LO very soon.

    • DD,

      I ended up making a decision this week and you’ll see the post come across the screen. It’s a “good” position to be in and a great time for me to take advantage of a capital loss from a small trade earlier this year. Looking forward to seeing what you do DD!

      -Lanny

  5. I’m not sure I would sell, unless it really changes the fundamentals for which I signed in! If I’d sell, I would go for one of the tops on my watch list. I would not necessarily stay in the same sector unless I really want to add in it. I would simply go for the best opportunity out there, in my opinion, at the moment. Let us know!

    Cheers!
    Mike

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