Tobacco companies have long been known for offering rich dividends. Reynolds American (RAI, Financial) is one such company. It is a dividend aristocrat. Despite hailing from an unhealthy industry, this company has a huge customer base. This company is known for becoming investors’ staple. It competes with premium brands and boasts of higher margins than most of them.
Third-quarter results
Reynolds American’s third-quarter adjusted EPS of $0.95 was up 10.5 percent from the prior-year quarter, as higher pricing, the ongoing benefit from the partial settlement of certain NPM Adjustment claims, and the impact of the share repurchase program more than offset cigarette volume declines and increased investment for the VUSE expansion. Third quarter EPS was $0.88, up 4.8percent. RAI’s third-quarter adjusted operating margin rose 0.2 percentage points from the prior-year quarter, to 38.0 percent. The company ended the quarter with cash balances of $1.3billion.
"I’m very pleased to report another strong performance by our operating companies, which drove Reynolds American’s earnings and margin higher in the third quarter,” said Susan M. Cameron, president and chief executive officer of RAI.
“All of our reportable business segments increased both profit and margin during the quarter, while they continued to enhance their powerful key brands.” In addition, management’s focus on building long-term sustainability as part of the company’s transforming tobacco strategy gained further momentum in the third quarter, with promising results from the national roll-out of innovative nicotine-based products.
“The expansion of R.J. Reynolds Vapor Company’s VUSE Digital Vapor Cigarette is going very well,” Cameron said. “VUSE will be available in almost 70,000 selected retail outlets by early next week, and that will be followed by another wave of expansion early next year.” Niconovum USA began national distribution of its ZONNIC gum, a nicotine-replacement therapy product, in September. “I’m pleased to say that early results are positive, with strong interest from retailers and smokers,” Cameron said. “ZONNIC is expected to be in about 8,000 selected outlets by the end of this month, and its retail availability will continue to grow through the rest of the year.”
RJR Tobacco
RJR Tobacco’s third-quarter adjusted operating income increased 14.6 percent from the prior-year quarter, to $748 million, as higher pricing and lower MSA costs more than offset a decline in cigarette volume. RJR Tobacco’s third-quarter adjusted operating margin increased 4.1 percentage points from the prior-year quarter, to 41.6percent.
American Snuff
American Snuff’s third-quarter operating income increased 10.9 percent from the prior-year quarter, to $117 million. American Snuff’s third-quarter operating margin increased by 0.8 percentage points to 57.8 percent.
American Snuff’s flagship Grizzly brand continued to perform well in a highly competitive promotional environment, increasing third-quarter market share by 0.1 percentage point from the prior-year quarter, to 31.1 percent, on volume growth of 3.6 percent.
American Snuff continues to refine Grizzly’s approach to balancing share and earnings growth, while investing inequity-building initiatives to further enhance the brand.
Santa Fe
Santa Fe increased third-quarter operating income by 19.1 percent from the prior-year quarter, to $98 million, again benefiting from higher volume and pricing.
Santa Fe’s third-quarter operating margin increased 3.5 percentage points from the prior-year quarter, to 54.5 percent.
(Source: Company’s Website)
Reynolds American-Lorillard Merger
Reynolds American and Lorillard (LO, Financial) have entered into a definitive agreement, where RAI has agreed to acquire Lorillard in a cash-and-stock transaction currently valued at $68.88 per Lorillard share, or a total of $27.4 billion, including the assumption of net debt. Significant cost benefits can be achieved through this deal.
“Reynolds American and Lorillard have complementary core strengths and the addition of Newport to our operating companies’ existing key brand portfolios –Â including flagship brands Camel, Pall Mall, Natural American Spirit and Grizzly –Â will enhance our ability to compete in the combustible cigarette and smokeless categories,” said Cameron. “We are also confident in R.J. Reynolds Vapor Company’s digital vapor cigarette VUSE, which offers superior technology and has received very positive early results in its national rollout. This transaction will provide RAI with additional resources to invest in innovation, R&D and its operating companies’ brands. This will benefit adult tobacco consumers and wholesale and retail customers alike.”
The acquisition of Lorillard will significantly strengthen and diversify R.J. Reynolds’ cigarette portfolio, resulting in the most balanced offering in the industry with brands including Newport. The addition of Newport will be a key component of R.J. Reynolds’ future growth-brand strategy as Newport leads the U.S. menthol category. Lorillard reported that Newport ended 2013 with a12.6 percent share of market, and the brand has demonstrated a solid growth trajectory over the past three decades.
R.J. Reynolds will also enjoy increased geographic capabilities resulting from its brands’ strength in the Western U.S. and Lorillard’s complementary strong presence in the Eastern U.S.
LO has a solid position in menthol and ecigarettes. RAI is going to benefit from this position. These two tobacco giants are expected to play well after this merger. The second and third tobacco companies in US are going to have huge combination benefits. Reportedly, the e-cig market is going to witness over $2 billion sales this year, giving these two companies more room to grow.
To end
Many have thought that the cigarette industry is a sunset industry because of the social stigmatization attached to it. But there is a silver lining to it since an increasing number of people are moving towards e-cigarettes. Out of the global $169 billion tobacco industry, about $6 billion comes from e-cigs. The U.S. is the largest e-cig market worth $1.7 billion as of 2014. This company has plenty of room for growth and to offer to its shareholders.
RAI is continuously ramping up its innovation process. It is taking the right initiatives to gain market dominance. This trend is going to continue. RAI is all set to build out a solid international presence, and it may be rightly said that it will find many tobacco huffers. Investors who have no issues with these companies should definitely consider taking up this company for consideration. It has been known for pumping steady returns to its shareholders. RAI is poised to grow further in the near future creating shareholder returns.
