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Reynolds American Looks to Challenge Altria in 2016

By Dan Caplinger – Feb 11, 2016 at 1:48PM

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The tobacco company's results showed strong growth.

Cigarette giant Reynolds American (RAI) has long aimed to catch up with larger rival Altria Group (MO -3.67%) in the lucrative U.S. tobacco market, and Reynolds' merger with Lorillard got it moving in the right direction. Coming into Thursday's fourth-quarter financial report, Reynolds investors had hoped to see continuing growth from the company, and the actual results that Reynolds released included some good news on the growth front that could potentially threaten Altria's leadership of the sector. Let's take a closer look at the latest from Reynolds American and what's in store for 2016.

Reynolds American keeps moving forward
Reynolds American's fourth-quarter results showed continued growth. Revenue jumped 43% to $3.05 billion, again reflecting the impact of the merger and just barely edging out the consensus forecast among investors. Adjusted net income of $692 million was up by nearly half from year-ago levels, but an increase in share count limited adjusted earnings to $0.48 per share, $0.02 less than what investors were expecting.

A closer look at the numbers shows the impact of the Lorillard merger even more clearly. The RJR Tobacco division saw adjusted operating income soar 66% due largely to the addition of the Newport brand. Cigarette shipments rose by nearly 35%, and operating margins climbed by more than 4 percentage points because of the greater mix of premium brands in the Reynolds portfolio of cigarette offerings. Market share was relatively stable at 31.8%, with better results for Newport offsetting flat performance from Camel and Pall Mall.

Reynolds' other key segments were also solid. The super-premium Santa Fe division reported a 23% rise in adjusted operating income in the wake of stronger pricing and volume growth. Natural American Spirit saw continued market-share gains that took its overall share up to 2%, reflecting 18% higher volume. Meanwhile, the American Snuff division boosted adjusted operating income by 18% and grew market share to above the one-third mark. The Grizzly brand continued to lead the way in the moist snuff category for Reynolds.

CEO Susan Cameron again noted the importance of getting the Lorillard merger behind it. "Each of our operating companies delivered excellent results both in the quarter and for the full year," Cameron said, and "the integration of Newport is going extremely well."

Can Reynolds American kick it up a notch?
Reynolds American is also pushing forward in the vapor category. Cameron noted that Reynolds product Vuse "remains the vapor category leader, and we expect the brand's lineup of exciting new formats to generate even more interest from adult tobacco consumers this year."

The strength of Vuse will be increasingly important for Reynolds American. Altria has continued and expanded its partnership with former subsidiary Philip Morris International (PM -4.18%) to look at cigarette alternatives, and Philip Morris International in particular has pushed the adoption of heat-not-burn technology hard in its iQOS system. Reynolds needs to be prepared for Altria and Philip Morris to come out with other innovations in the vapor and e-cigarette market, but Reynolds is confident that it can keep the pace.

Specifically, Reynolds gave guidance for the full year, projecting 2016 adjusted earnings of $2.25 to $2.35 per share. That would represent a gain of 14% to 19% compared to 2015 earnings, showing that Reynolds expects its growth pace to accelerate into the current year.

Reynolds also gave investors good news with a dividend increase. A 17% rise in the quarterly dividend to $0.42 per share will bring the stock's yield up to 3.5%, rivaling Altria's 3.8% yield.

Reynolds American shareholders were pleased with the results, sending the stock up 1% following the announcement on a day on which major market benchmarks were down around 2%. Reynolds' merger with Lorillard is paying off, and the gains that Reynolds has seen will continue to challenge Altria both in 2016 and in years to come.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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Stocks Mentioned

Altria Group, Inc. Stock Quote
Altria Group, Inc.
$41.68 (-3.67%) $-1.59
Philip Morris International Inc. Stock Quote
Philip Morris International Inc.
$91.79 (-4.18%) $-4.00
Reynolds American Inc. Stock Quote
Reynolds American Inc.

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