Reynolds American (RAI)
From Cabot Wealth Advisory 7/29/14 Sign up for Cabot Wealth Advisory—it's free!
My most recent dividend growth recommendation is Reynolds American (RAI). Here’s what I wrote about it in the July issue of Cabot Dividend Investor.
“Reynolds American (RAI) is the second-largest U.S. tobacco company. The company has a long history of prioritizing shareholder returns, and aims to distribute about 80% of net income to shareholders.
“There’s also a growth story here: Reynolds is making major inroads into the e-cigarette market, which is both fast growing and lightly regulated (for now).
“Reynolds has paid dividends since 1999 and has never cut its dividend. The current quarterly dividend of $0.67 per share delivers a generous yield of 4.4% at current prices.
“Reynolds has increased the dividend every year since 2005, at an average rate of about 11% per year, earning the stock a Dividend Growth Rating of 8.45. The Dividend Safety Rating is also in very good territory, at 7.98.
“Reynolds is able to maintain a high payout ratio thanks to its very predictable cash flow. The company aims to distribute 80% of annual consolidated net income to shareholders, and has averaged a payout ratio of about 92% of EPS since 2009. The company’s current payout ratio (based on the past 12 months) is in line with the historical average, at 90%. (While this would be high for many stocks, Reynolds has proven it can grow the business even with the payout ratio at this level.)
“The stock’s rapid four-month advance may be followed by a pullback or a consolidation here. However, the first numbers from the nationwide rollout of its e-cigarette, Vuse, are likely to act as a catalyst for further advancement later this year, as could its Lorillard acquisition.”
Sure enough, the stock encountered a pullback on July 15, and has continued to move lower as investors analyze the results of this mega-merger. RAI is now trading below 57, which looks like a bargain in valuation terms.
And today, Reynolds American reported that its second-quarter earnings rose by 6.7%, topping analysts' expectations.
|Reynolds American (RAI)
401 North Main Street
Winston-Salem, North Carolina 27101
|Index Membership: N/A
Sector: Consumer Goods
Full Time Employees: 5,200