Tobacco companies have long been known for offering rich dividends. Reynolds American (RAI, Financial) is one such company. Reynolds American delivered excellent results in the second quarter, in addition to successfully completing the Lorillard (LO, Financial) acquisition and related divestiture
It has a strong financial position. I am bullish about this company because it has achieved notable progress in the second quarter of 2015. In spite of hailing from a challenging industry, RAI is making aggressive efforts to gain a solid position. The company is already gaining momentum in key market regions. RAI is one of the very few companies that provide high dividends at great price.
RAI is taking continual steps to improve its market position. It is concentrating on building up a solid international presence. Regular price hikes are going to add to its earnings in the future.
Strong second quarter
Net sales increased by 11.1% from the prior year quarter.
Adjusted EPS was $1.02 (which increased by14.6% from the prior-year quarter).
Reported second-quarter EPS was $3.38.
Reported (GAAP) operating income increased by 422% during the second quarter from the prior year quarter.
Adjusted (non-GAAP) operating income increased by 25.1% from the prior year quarter.
Reported (GAAP) net income was $1,928 (million), which marked an increase of 291.9% from the prior year quarter.
Adjusted (Non-GAAP) net income during the quarter was $579 (which marked an increase of 22.2% from the prior year quarter).
Total RAI operating companies’ domestic cigarette volumes increased 5.6% in the second quarter (which was 1.9% during the prior year quarter).
Santa Fe delivered outstanding performance in the second quarter. The company grew second quarter operating income by 48.9% from the prior-year quarter, to $125 million, driven by higher pricing and strong volume growth.
Newport, the nation’s No. 1 menthol brand, continued to advance in the second quarter, with the brand adding 0.4 percentage points of retail market share from the prior-year quarter, to 13.2%.
American Snuff’s second-quarter operating income increased 17.9% from the prior-year quarter, to $130 million, benefiting from higher pricing and volume.
RAI’s long-term debt now stands at $17.6 billion, with an average interest rate of 4.5% and an average maturity of 12.4 years.
RAI ended the quarter with cash balances of $4.0 billion.
Dividends
RAI’s board has also approved a 7.5% dividend increase to an annualized split-adjusted $1.44 per share. The quarterly dividend will be payable on Oct. 1 to shareholders of record on Sept.10.
Certain hiccups
- Currency headwinds
- Declining tobacco volumes
- Increasing regulatory control
Focus at the moment
- Deep commitment to returning value to the shareholders
- Cost curtailment
- Churning of higher operating cash
- International expansion
- Relentlessly innovate product lines
- Reduction of smoking harm
- Driving innovation
Strong attributes of the second quarter
- Superior consumer and trade marketing
- Efficiency and productivity gains
- Strong brands in key categories
- Strength across price points
Management
RAI announced several executive changes at both RAI and its largest subsidiary, R.J. Reynolds Tobacco Company. All the changes will be effective Oct. 1.
Debra A. Crew, president and chief commercial officer of R.J. Reynolds, will become president and chief operating officer of the company. She will assume management responsibility for the company’s manufacturing operations and research and development functions, in addition to her ongoing responsibility for the consumer and trade marketing functions.
Ecigarette industry
Studies suggest that the global ecigarette market will grow at a CAGR of 24.14% 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 ecigarettes among smokers worldwide.
Further, the report states that one key challenge that the market faces is stringent government regulations and standards. Recently, the United States' FDA-imposed regulations that ban the sale of ecigarettes to people under the age of 18.
(Source: Research and Markets)
On a concluding note
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. 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 ecigarettes. Out of the global $169 billion tobacco industry, about $6 billion comes from ecigs. The United States is the largest ecig 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 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.
RAI is a strong company, but since the tobacco industry is currently facing a lot of headwinds, this company has to overcome a lot of obstacles. But there is good news. Since the company is focusing on international markets, it does not have to comply with a lot of restrictions because the U.S. is mostly posing these regulations to the tobacco companies.
The company reinforced a great start with solid second quarter results. While currency headwinds remain stubbornly high, the company is ever focused on the prudent management of cash flow. It is committed to returning around 100% of free cash flow to shareholders.
