Tobacco companies have long been known to return rich dividends to investors. Reynolds American (RAI, Financial) is no exception. It is the parent company of R.J. Reynolds Tobacco Company; American Snuff Company LLC; Santa Fe Natural Tobacco Company Inc.; Niconovum USA Inc.; Niconovum AB and R.J. Reynolds Vapor Company.
Reynolds American’s operating companies began the year with strong momentum adding profitability to the company. The company benefited from increased volumes and higher pricing on both cigarettes and moist snuff. Newport, the nation’s No. 1 menthol brand, again demonstrated strong momentum, benefiting from an improved presence at retail stores and increased engagement with adult tobacco consumers. The brand’s first-quarter retail market share increased by 0.6 percentage points from the prior-year quarter to 14.0%.
First-quarter results
It reported EPS of $2.49, which marked an increase of 591.7% from the prior-year quarter.
Adjusted first-quarter EPS was 50 cents, which marked an increase of 16.3% from the prior-year quarter).
Adjusted operating margin increased by 8.0 percentage points from the prior-year quarter and was 45.2%.
The company ended the quarter with cash balances of $4.4 billion.
Dividend
During the quarter, the company announced a 16.7% increase in the quarterly cash dividend, to an annualized $1.68 per share, in line with Reynolds American’s target dividend payout ratio of 75%.
Combustibles
Total Reynolds American operating companies’ cigarette volumes increased by 34.2% in the first quarter.
In the first quarter, total Reynolds American operating companies’ retail cigarette market share increased by 0.3 percentage points and was 34.6%.
Total retail cigarette market share in Reynolds American operating companies’ drive brands (Newport, Camel, Pall Mall and Natural American Spirit) increased by 0.5 percentage points to 32.0% in the first quarter.
RJR Tobacco
RJR Tobacco’s reported first-quarter operating income increased by 88.3% and was $1.11 billion.
Adjusted first-quarter operating income was $1.12 billion, which marked an increase of 73.8%.
Adjusted first-quarter operating margin increased by 6.4 percentage points from the prior-year quarter to 46.5%.
RJR Tobacco’s first-quarter cigarette shipments increased by 35.1% from the prior-year quarter.
The combined first-quarter retail market share of RJR Tobacco’s cigarette drive brands — Newport, Camel and Pall Mall — increased 0.2 percentage points from the prior-year quarter and was 30%.
Camel’s first-quarter cigarette retail market share decreased by 0.2 percentage points from the prior-year quarter and was 8.2%.
Santa Fe
Santa Fe posted another strong performance, increasing first-quarter operating income by 33.2% and was $123 million.
Operating margin increased by 2.5 percentage points from the prior-year quarter and was 56.4%.
Natural American Spirit, the nation’s No. 1 super-premium brand, continued to attract positive adult consumer interest in markets across the nation. The brand gained 0.3 percentage points of retail market share from the prior-year quarter, to 2.0%, on volume growth of 22.1%.
Moist snuff
American Snuff
American Snuff reported an increased operating income of $133 million (an increase of 11.9%). Operating margin increased by 2.4 percentage points and was 61.3%.
American Snuff’s first-quarter moist-snuff retail market share increased by 0.2 percentage points and was 33.4%.
The company’s flagship Grizzly brand continued to make solid gains, especially in fast-growing wintergreen and pouch styles. The brand increased first-quarter retail market share by 0.4 percentage points from the prior-year quarter, to 30.8%, on volume growth of 3.9%.
(Source: Company’s website)
Expectations for 2016
The company expects the EPS to be in a range of $2.25 to $2.35.
Focus
- It continues to invest in smoke-free growth platforms for the future.
- Capitalize on additional opportunities for growth in the coming year.
- Deliver strong financial and marketplace performance.
- Further enhance shareholder value.
- Focusing on innovation.
- Engaging with adult tobacco consumers while maintaining efficient and effective operations.
Positive attributes of the company
- Good dividend history.
- Strong earnings growth.
- Quarterly revenue growth.
On a concluding note
It continued to deliver outstanding performance in the first quarter, and its businesses strengthened its market leadership with strong income growth and solid retail share gains. Reynolds American and its operating companies delivered robust growth in 2015. Reynolds American’s $5 billion sale of the Natural American Spirit business outside the U.S., completed in January, allowed it to further pay down its debt.
Despite hailing from an unhealthy industry, this company has a huge customer base. It is known for becoming investors’ staple. It competes with premium brands and boasts of higher margins than most of them. Adding this company is going to create shareholder returns.
Disclosure: I do not hold any position in the company.
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