So what: As you can see from the chart above, much of Reynolds American's gains came on July 28, when the stock jumped 6%. The parent of brands including Camel and Natural American Spirit said adjusted second-quarter profits jumped 15% to $1.02 a share ahead of estimates at $0.97, while sales were up 11% to $2.4 billion, the fastest growth rate it's seen in years. Reynolds American benefited from its recent acquisition of Newport-parent Lorillard, which closed on June 12, as well as higher cigarette and moist-snuff pricing. Following the acquisition of Lorillard, Reynolds American divested some brands including Winston, KOOL, and Salem.
Reynolds also raised its dividend by 7.5% in the announcement, giving shareholders a 3.4% yield at today's share price.
Now what: Despite the seeming headwinds against the tobacco industry as fewer Americans smoke, companies like Reynolds American continue to thrive as the stock is up by more than five times since the recession. Its acquisition of Lorillard gives it control of the powerful Newport, the leading menthol cigarette label. Menthols have been unique in tobacco as a growth category, making it an especially valuable asset. In fact, Reynolds American sold off Lorillard's Blu e-cigarette brand to Imperial Tobacco, in order for the merger to pass regulatory muster. The move indicates that Reynolds American is choosing to bet on traditional tobacco rather than e-cigarettes, and management also argued in the deal that its Vuse e-cigarette brand is a better product than Blu.
Industrywide domestic cigarette volume sales are still growing slightly, and Reynolds American is outpacing competition. Coming off the merger, the company should have increased growth and profitability opportunities. Management raised its full-year guidance in last week's report and now expects EPS of $1.90 to $2.00, up 11% to 17% from the year before. With a generous dividend, reliable business model, and a strong portfolio of brands including Camel and Newport, Reynolds American should continue to deliver superior returns for investors.