A Nasty But Profitable Business
With Altria finally breaking itself up into its domestic and international tobacco businesses, a lot of Home Gamers want to know how to play it. Do you buy the global or the domestic business? Cramer thinks the real play on the breakup isn’t either. It’s Carolina Group .
Right now, overall U.S. cigarette volumes are in decline and it is a steady long-term trend, Cramer said. It’s good for our health, but terrible for tobacco stocks. However, there’s one group within the cigarette market that’s still growing domestically: menthol cigarettes. And within menthols, there’s one brand that’s really taking share: Newport. As it happens, Newport is owned by Lorillard, which itself is a wholly owned subsidiary of the Carolina Group. Newport brand cigarettes are actually 90% of Lorillard’s sales and volume, and with Newport taking share left and right, that’s some nice leverage, Cramer said. For that reason, along with efficient production and promotion and its ownership of the highest-priced premium brand, Carolina Group is the most profitable cigarette company in the country.
Newport has everything you want in a cigarette brand. It has an extremely loyal and young customer base. CG probably did some abhorrent things to get those young smokers on board with its product, Cramer said, but he's confident somebody’s going to make money in this stock and it might as well be you.
CG also has some serious room to expand as it’s based mostly east of the Mississippi. Cramer thinks the company can come in and take share in cities like Los Angeles, Houston, Dallas and New Orleans – which all have favorable demographics for Newport even though Newport has below average share in each of them – because it’s the only tobacco company in the U.S. that’s had any success growing sales recently.
Finally, Cramer sees one more great point in favor of Carolina Group. Lorillard, which is the company CG owns that actually makes the cigarettes, is heavily levered to a class action lawsuit that, when it ends, should allow CG to raise its dividend payout to as much as $5 per share in 2008, up from its $1.82 annual dividend right now. Because of the lawsuit, CG has to remain at a certain net worth for the duration, which means it isn’t free to use cash effectively. When the case ends, which Cramer expects to happen later this year, CG will be free to use its money however it wants, and Cramer thinks that’s when it will raise the dividend. Carolina Group could go from being a company with a 2.4% yield to a company with a "stellar" 6.5% yield.
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