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.
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.
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!