Will Lorillard, Reynolds Be The No. 2 Tobacco Firm?

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Tobacco maker Lorillard settled to a 4% gain Friday after surging nearly 7% in early trade. Its IBD Dividend Leader peer Reynolds American went the other way, narrowing an early 3% loss to 1% by the end of the day.

The two stocks moved on early reports, confirmed later in the day, thatReynolds American ( RAI ) was in talks to buyLorillard ( LO ). The deal, which could be announced as early as Monday, according to the Wall Street Journal, would create the industry's second-largest player, with market capitalization of more than $50 billion. Market leaderAltria ( MO ), also an IBD Dividend Leader, sports a market cap of more than $86 billion.

Altria owns the Marlboro brand. Reynolds is home to Camel, Pall Mall, Winston, Salem and Kool. Lorillard markets the Newport and Maverick names.

Cigarette makers, like alcohol makers, are often viewed as defensive plays in stressed markets. Demand for such products tends to remain steady, regardless of economic conditions. But health concerns and regulatory restrictions have led to long-term declines in cigarette sales. Lorillard is a leader in electronic cigarettes, seen as a smokeless, less dangerous alternative to traditional smoking and considered one of several hot spots within the industry.

British American Tobacco ( BTI ) owns 42% of Reynolds. Another British tobacconist, Imperial Tobacco, announced Friday that it was discussing a possible acquisition of assets from both Reynolds and Lorillard.

Lorillard shares have easily outpaced the market this year, rising 31% since Dec. 31. The stock eked out a new high Friday but has had trouble breaking free of its 10-week moving average since clearing a flat base in May. The company's dividend yields 3.9%.

Reynolds is up 23% year to date and has tested 10-week support once since a March breakout. Its dividend yields 4.3%.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance , Investing Ideas

Referenced Stocks: RAI , LO , MO , BTI

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