Reynolds American: 6% Yield Shows Commitment to Shareholders

Reynolds American (RAI), the second biggest cigarette manufacturer in the United States, presents an opportunity for the discerning investor. While the legal pressures facing the tobacco industry have receded modestly, this positive development has been more than overshadowed by the specter of the FDA oversight bill Congress is reviewing. This bill would allow the FDA to regulate cigarette composition (with several exceptions) and would serve to solidify rival Phillip Morris USA’s dominant position in the US market. It appears the bill is dead for the foreseeable future, as a vowed filibuster by Senate Republicans and a threatened Presidential veto thwart its advance for the near-term.

Reynolds, trading around 55 after strong earnings, yields 6.6%. This is in addition to a generous buyback announced last quarter, and speaks volumes to the company’s commitment to reward shareholders. The business model Reynolds employs – characterized by a targeted approach to profitable growth and a hard line in terms of expenses, is well-suited to the current environment facing tobacco companies. Strong cash flow and fiscal discipline recently lead to an upgrade in the company’s debt rating to investment grade levels, a development which will facilitate cheaper interest costs and reflects well on managements focus. Tobacco companies – whose financial futures have a pall cast over them by potentially crippling ongoing litigation – are held to a high standard by the rating agencies.