Tobacco tracking stock shows Loews the way.

• Author: O'Connor, Brian J.
• Position: Money Matters

When you have a cash cow, you milk it for all it's worth. That's what Loews Corp. did in February, when it created a tracking stock called Carolina Group (NYSE: CG) to represent its Greensboro-based Lorillard Tobacco Co. subsidiary. Sale of Carolina Group shares netted New York-based Loews (NYSE: LTR) $933.4 million, and Loews stock jumped 25% between the announcement and the sale.

Carolina Group also must pay Loews as much as $200 million a year -- even if there's no Carolina Group dividend. If Loews wants to buy back the stock after the IPO's second anniversary, it doesn't have to pay more than a 20% premium. Carolina Group shareholders are really second-class Loews shareholders with limited voting rights. What they're buying is the hope of big tobacco dividends and trading gains.

There haven't been any price spikes so far. Analysts say the stock will gain $4 to $11 this year, but it spent its first 30 days trading mostly between its $28 IPO price and $30. It might be suffering from the histories of other tracking stocks. Often, they have been speculative ventures from old-line companies, and they quickly soured. General Electric, for example, launched a tracker for its NBC Internet initiative at $81.38 a share in February 2000. GE bought it back at $2.19 in August 2001.

Carolina Group investors can expect a bump in price after the first dividends are paid, Prudential Securities' Rob Campagnino says. And it's the dividends that give investors the safest path to profitability. Unlike many tracking stocks, in which investors buy into some new idea, Lorillard is the nation's fourth-largest tobacco company and has long been the engine that has powered Loews' growth.

Lorillard's revenue grew 4% to $4.5 billion in 2001, and its Newport brand is second only to Philip Morris' Marlboro. The projected 44.5-cent quarterly dividend for this year would give Carolina Group one of the highest dividend yields among tobacco stocks -- 6.1% vs. 5.3% for Reynolds and 4.3% for Philip Morris.

No rules prevent Loews -- which lost $589 million in 2001 but managed to bump its annual dividend from 50 to 58 cents a share -- from keeping Lorillard's profits if its losses continue. But it has an interest in maintaining the Carolina Group dividend: It kept 80% of the stock. And cutting the dividend could crash both stocks.

Carolina Group should keep giving Loews plenty of cream to skim off the top. Now investors have been promised a taste, too.

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