The Drag on Reynolds American

Tobacco maker Reynolds American (NYSE: RAI) is no longer trading with the momentum of years past. With the stock down 3.5% year to date, it appears as though the price appreciation of 20% to 40% over the past few years may be behind us. That said, the stock is still a consistent performer with predictable cash flow.

Late last week, the company reported that Q3 brought a 12% increase in adjusted earnings per share on a 4.9% increase in net sales. In very much the same fashion as rival Altria (NYSE: MO), Reynolds American has been able to offset cigarette volume decreases in the U.S. with price hikes. This was a main contributor to management's increase in guidance.

Another way the company can compensate for sluggish cigarette sales is its smokeless tobacco arm. Conwood contributed another impressive quarter, with an 18.4% increase in pro-forma operating income on a 12.3% increase in volume versus the year-ago quarter. The segment picked up additional market share in the quarter, and new styles are being tested in hopes of  continuing the growth.

The 4% decrease in domestic shipment volume for cigarettes that Reynolds American experienced during the third quarter indicates a challenge facing the tobacco industry. That does not mean that this market cannot remain profitable. International exposure as well as the smokeless tobacco market have brought booming business to British American Tobacco (NYSE: BTI) and Imperial Tobacco Group (NYSE: ITY), which are trading up 37% and 43%, respectively, year to date.

With pricing power and a 5.4% dividend yield, Reynolds American still is an attractive opportunity for income investors and value investors alike. We'll see whether the company will be able to once again produce monstrous returns, but in any case, its consistent performance makes its stock a relatively safe bet. 

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