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Should You Buy and Hold Reynolds American?

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Being able to retire rich, or at least comfortable, is the goal of almost any investor. However, it's much easier said than done. In a recent Wells Fargo survey, respondents between the ages of 50-59 said that they had, on average, about $29,000 saved up. With pensions all but gone, and Social Security targeted for cuts in the future, it's hard to count on anyone but yourself. But $29,000 isn't going to cut it for most people, so you've got to get involved in the stock market in order to grow that nest egg. Getting in the game is the easy part; choosing the right stocks is the hard part.

Making prudent decisions
Generally speaking, I look for four traits in a retirement stock:

  1. Valuation: Investors of all ages want to make sure they're not overpaying for a stock, but this matters even more in retirement. Retirees don't have the long time horizon that younger investors have, so it's essential to make sure you don't overpay in the short term.
  2. Dividends: Most retirees need a combination of both growth and income, as they'll be depending more and more on their portfolio to help with everyday expenses. Companies that pay dividends not only offer immediate income, but they've also proven to outperform non-paying dividend companies over long periods of time.
  3. Growth: Investors love dividends, but everyone wants to see their stocks rise over time. Growth can be as big a part of your portfolio as a steady dividend. It's important to note that you don't need a high-flying stock that's going to shoot to the moon; a company that can grow and outperform the market is hard enough to find, so steady growth is highly covetable.
  4. Low volatility: Retirees want to invest in great growth stocks just as much as anyone else, but they also want to be able to rest well knowing that their portfolio won't be taking them on a roller-coaster ride. At the end of the day, most retirees would rather own a sturdy company that lets them sleep at night than a company that whips up and down with the gyrations of the market.

Although some companies are definitely more geared toward retirees, which companies you choose to invest in will be dictated largely by what you already have in your portfolio. Small, mid, and large caps can all play a role in your investing strategy, so I chose to evaluate all varieties of stocks in this regular series.

So how does Reynolds stack up?
In order to check out the valuation of Reynolds (NYSE: RAI  ) , we don't want to look at only its P/E ratio of 16.4. That may seem cheap, but really we don't know without looking at the ratio in historical context. Over the last five years, Reynolds' average P/E ratio has been 14.1, which is less than the current ratio. This suggests that investors may be paying more than they've had to in the past, so it's important to find out why the price tag might be a bit higher today.

Reynolds' dividend is 5.5%. This is tremendous; not only does Reynolds pay a dividend, but it pays more than the average company in the S&P 500.

Next, we want to ensure that Reynolds' stock has the ability to rise over the next five, 10, or 20 years. A company that's growing its net income has the best possible chance to see its share price rise over time. Of course, we can't predict the future, but we can look back to get an idea of how the company has performed in the past in order to try to ensure future earnings growth. Over the past five years, Reynolds has grown its net income by 4.6% annually. Fortunately, Reynolds has been able to grow its earnings over the past five years, and that's pretty significant considering all of the market turmoil in the last few years. Of course, this doesn't mean that growth will continue, but it's a great sign that the company can prosper in the face of difficulty.

One of the best measures of volatility is called beta. Beta measures the impact that the movement of the stock market will have on a particular stock. For instance, a beta of 1.0 signifies that Reynolds will move in tandem with the market; a beta of 2.0 means that the stock will move up twice as much as the general market, and vice versa. In this particular case, Reynolds has a beta of 0.7, which is pretty low. Generally speaking, I like to see a beta below 1.2 for retirees. In this case, Reynolds fits the bill.

Let's look at the competition
We've taken a look at Reynolds, and maybe you think it's passed all the tests, or maybe you just don't feel comfortable with the results. Either way, it's beneficial to see how a company stacks up in its industry, because it's just as important to understand a company's competitors as it is to understand that particular company. Here are Reynolds' stats when compared to three of its closest competitors:

Company

Current P/E

Dividend Yield

5-Year Net Income CAGR

1-Year Beta

Reynolds 16.4 5.5% 4.6% 0.7
Altria (NYSE: MO  ) 14.4 5.5% 14.7%* 0.4
Philip Morris International (NYSE: PM  ) 17.0 3.7% 6.1%** 0.6
Lorillard (NYSE: LO  ) 16.1 4.6% 6.3%** 0.6

Source: Capital IQ, a division of Standard & Poor's. * 2-year growth rate. ** 3-year growth rate.

Each company has traits to like and traits left to be desired. Either way, it's beneficial to look at the industry picture and not just Reynolds in isolation.

Of course, I can't decide for you whether or not this is the best stock for retirement, but it has passed three of the four tests, which is pretty impressive. It doesn't necessarily mean this stock is a slam dunk, but it has shown its ability to reward shareholders and that means it could have a place in your portfolio.

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Jordan DiPietro owns no shares. The Fool owns shares of Wells Fargo. The Motley Fool owns shares of Altria and Philip Morris International. Motley Fool newsletter services have recommended buying shares of Philip Morris International and writing puts in Lorillard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 21, 2011, at 10:46 AM, jekoslosky wrote:

    Is anyone uncomfortable investing in a cigarette company? I've never put money into one, but a friend brought up the "ethics" of it as he was talking about stocks he was considering recently.

    I blogged more about it here: http://bit.ly/kxOo0x

  • Report this Comment On June 21, 2011, at 12:50 PM, Bobjitsu wrote:

    I have a position in MO and feel fine with it. I have never touched a cigarette but I have no problem if others do, that is a personal choice. My dad and mother died from smoking, my cousin just died last month from lung cancer from smoking....it was their choice to smoke, nobody made them. I used to hate the smell of smoke, now it smells like retirement will be here just a little faster,,,,

  • Report this Comment On June 21, 2011, at 1:08 PM, mm5525 wrote:

    PM is a better stock IMO simply because it does all it's business outside the US, thereby free from FDA regulations and carries the world's most prominent brand in the space: Marboro. Just in the past day or so the FDA proposed 50% of the cigarette package to show a round robin of 9 different pictures of lung cancer, smoke coming out of people's throats, and other anti-smoking pictures. The FDA recently pushed to ban outright menthol cigarettes. So, in both cases, PM is free of that, although Canada has similiar measures in place, and Australia has mentioned things such as plain-packaging measures to discourage smoking. Simply due to intellectual property rights, I doubt plain packaging could ever be implemented, especially with the risk of counterfeit cigarettes more easily produced if there was plain packaging, thereby countries losing the tax revenue, in addition to the intellectual property rights. Smokers are fading in the USA, but that is not true worldwide. PM buys back 5 billion dollars of their own stock every year as well. With the growing middle class in India and the Asia Pac, PM is the play in this space IMO.

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Related Tickers

11/21/2014 4:00 PM
RAI $65.29 Up +0.09 +0.14%
Reynolds American,… CAPS Rating: ****
LO $63.54 Up +0.40 +0.63%
Lorillard, Inc. CAPS Rating: *****
MO $49.24 Up +0.41 +0.84%
Altria Group, Inc. CAPS Rating: ****
PM $87.00 Up +1.19 +1.39%
Philip Morris Inte… CAPS Rating: ****

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