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.
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 – including flagship brands Camel, Pall Mall, Natural American Spirit and Grizzly – 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 e cigarettes. 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 the U.S. are going to have huge combination benefits.
Recent financials
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 4.8 percent. 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 $1.3 billion.
"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 rollout 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.”
e-cigarette industry
Studies suggest that the global e-cigarette market will grow at a CAGR of 24.14 percent over the period 2014-2019. One major trend emerging in the market is the shift toward vaping instead of smoking. The market is witnessing increased adoption of vapor mods/units among vapers. This is expected to affect the revenue of cigalike vendors during the forecast period of 2014-2019.
According to the report, the increased desire among consumers to quit smoking tobacco is one of the major drivers of the market. The increase in the number of deaths caused by smoking-related cancer has encouraged people to stop smoking traditional cigarettes, and this has increased the adoption of e-cigarettes among smokers worldwide.
Further, the report states that one key challenge that the market faces is stringent government regulations and standards. Recently, the U.S.'s FDA imposed regulations that ban the sale of e-cigarettes to people under the age of 18.
(Source: Research and Markets)
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 continually 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 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.
