Tags: Reynolds | RAI | MO | PM

Reynolds American a Defense in Uncertain Times

By    |   Friday, 30 Sep 2011 03:17 PM

For some investors, tobacco stocks are to be avoided. They are, after all, a recognized health hazard. For others, the defensive characteristics of a tobacco firm such as Reynolds American (RAI) makes the stock an attractive portfolio choice in rough markets.

Reynolds American is a tobacco company formed in 2003 from the merger of R. J. Reynolds and American Tobacco. The result is a company producing both cigarette and smokeless tobacco products. Camel and Pall Mall are the company's two growth brands in cigarettes. American Snuff has the Grizzly brand of smokeless tobacco and the Santa Fe Natural Tobacco Company sells cigarettes with an environmentally friendly, alternative-lifestyle focus.

For the second quarter of 2011, Reynolds American reported adjusted net income of 67 cents per share, up a penny from a year earlier. GAAP net income of 52 cents reflected a one-time $142 million charge related to a smoking cessation lawsuit. In the earnings report, management issued refined guidance of $2.62 to $2.70 per share adjusted earnings for the full year 2011. The Wall Street consensus estimate for 2012 is earnings of $2.84 per share.

Dividends for defense

In 2010, Reynolds American management implemented a policy of paying 80 percent of net income as dividends to shareholders. Over recent years, shareholders have earned a consistently high and growing dividend. The annual payout rate increased to $2.12 in 2011 from $1.38 per share in 2006, making for a current yield of about 5.5 percent. Management expects earnings growth percentages to be in the high single digits for the foreseeable future. If this level of growth is maintained, expect matching dividend growth.

Negatives for Reynolds American are an overall decline in the number of cigarettes sold and the constant overhang of legal issues. Offsetting those problems are pricing strength and growing smokeless tobacco sales.

Recently, the analysts at Moody's Investors Service upgraded the financial outlook for Reynolds American to positive from stable. Standard & Poor's tobacco analyst Esther Kwon rates RAI as a buy. It should be noted she rates competitors Altria Group (MO) and Phillip Morris International (PM) as strong buys.

The company reports next on Oct. 20.

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For some investors, tobacco stocks are to be avoided. They are, after all, a recognized health hazard. For others, the defensive characteristics of a tobacco firm such as Reynolds American (RAI) makes the stock an attractive portfolio choice in rough markets. Reynolds...
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2011-17-30
Friday, 30 Sep 2011 03:17 PM
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