The tobacco industry has always been a favorite spot for dividend investors to concentrate their efforts, and Reynolds American (RAI) and its current dividend yield of 4.4% put it among the top stocks in the U.S. market. But even though most people don't think of tobacco companies as high-growth candidates, Reynolds American's pending takeover of Lorillard (LO.DL) could have the effect of vaulting the combined entity into a much stronger position in the U.S. tobacco market against top seller Altria (MO -1.11%). To assess whether Reynolds American still looks like a smart buy for those interested in getting more income from their portfolios, let's take a closer look at two things every dividend investor should know about Reynolds American.
1. Reynolds American just posted strong third-quarter results.
In the midst of a merger, many investors forget about a company's ongoing earnings results. Yet, last week, Reynolds American released its latest financials, and the tobacco giant saw some encouraging signs that could bode well for dividend investors down the road.
Both revenue and earnings per share rose about 5% from the year-ago quarter, and those results included one-time items that actually held back stronger growth. On an adjusted basis, net income climbed almost 8% and, combined with buyback activity that has reduced share counts during the past year, adjusted earnings per share gained 10.5%. As CEO Susan Cameron noted, "[a]ll of our reportable business segments increased both profit and margin during the quarter, while they continued to enhance their powerful key brands."
The RJR Tobacco unit saw adjusted operating income climb almost 15%, even as cigarette shipments dropped 2.9%. The American Snuff division saw an 11% rise in operating income, while the Santa Fe segment enjoyed the biggest operating-income gains of 19%, as volume and pricing showed solid increases.
Looking forward, Reynolds American affirmed its previous guidance for the year, expecting adjusted earnings per share in the $3.35 to $3.45 range. That should be ample to sustain Reynolds American's dividend in the near term, and it bodes well for the company's ability to produce consistent dividend growth into the future, as well.
2. Reynolds American is planning for a future when traditional cigarettes disappear.
Few industries have faced more existential threats to their business models than Big Tobacco. But even though every tobacco producer has had to deal with legal liability, regulatory scrutiny, and a host of other business challenges, Reynolds American has moved forward to make the best of the situation.
For instance, many tobacco companies see anything that helps customers quit smoking as a threat to their business. But Reynolds American has actually moved aggressively to foster and profit from those looking to quit smoking -- the company purchased Niconovum five years ago, which led to Reynolds American distributing its Zonnic nicotine replacement gum product across the nation. Even though the nicotine-replacement market is far smaller than the traditional cigarette industry, Reynolds American hopes not only to make some money from the business, but also to improve its reputation among anti-smoking advocates.
Moreover, Reynolds American recently made a big push forward in the electronic cigarette market with its larger rollout of its Vuse line of e-cigarette products. Many investors worry that Reynolds plans to divest the blu eCigs line of cigarette alternatives when it completes its merger with Lorillard, given that blu originally jumped out to the early lead in terms of market share. Yet, as Altria and Reynolds American have released their own products, blu's lead has started to shrink, showing that the market is still wide open for traditional tobacco companies to broaden their product offerings and tap into possible growth opportunities.
In the long run, Reynolds American needs to establish that it can grow beyond its current cigarette-reliant business model and find higher-growth alternatives to pursue. If it can succeed, both by combining forces with Lorillard and exploring new product lines, then dividend investors should continue to reap the same rewards they've enjoyed for years as Reynolds American shareholders.