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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Reynolds American

July 24th 2009 Reynolds American
NYSE Symbol: RAI
Industry: Tobacco
Price as of 7/24: $42.05

The averages have performed great in July. The Dow is up 10%, the Nasdaq is up 6%, and the S&P 500 is also up 6%. With the markets up so much in the short term, it might be best to focus on defensive dividend stocks once again. Three tobacco companies reported strong earnings this week including Altria, Philip Morris, and this week's featured stock Reynolds American. The nation's second-largest cigarette company, Reynolds American continues to perform well. Business has remained strong allowing the stock to rebounding nicely from the March lows. But even with the four month rally, the stock still trades for less than 10 times earnings and provides a whopping dividend yield of 8%.
On Thursday morning, Reynolds American posted a 4% rise in earnings easily beating estimates by 13 cents even as sales missed their target. The company, whose brands include Camel and Pall Mall, also boosted its full-year adjusted earnings range above Wall Street's expectations. It credited the raised guidance to more normalized trade inventories and shipping patterns, clarity on federal excise tax hikes, and first-half results. Earnings for the second quarter rose to $377 million, or $1.29 per share, from $364 million, or $1.23 per share, a year earlier. Revenue for the Winston-Salem-based company dipped 4% to $2.25 billion from $2.34 billion. The flagship brand Camel had a quarterly cigarette market share of 7.5%, which was in line with year-ago results. Camel Snus smokeless tobacco products added a little to results. Pall Mall second-quarter market share climbed 2.6% points to 5.2%. The brand's most recent promotional period, which coincided with the federal excise tax increase, was widely welcomed by smokers as they reevaluated brand choices in light of higher prices. The company expects full-year adjusted profit of $4.40 to $4.60 per share, which takes out any trademark impairment charges but includes a year-over-year pension expense increase of 40 cents per share. Prior outlook was for earnings of $4.15 to $4.45 per share. Analysts expect net income of $4.34 per share for the year.
Even though Reynolds American's stock has performed well, the stock still trades for less than 10 times next years earnings. The stock also trades for 2 times book value and 1.38 times sales. The best attribute of the stock is the dividend yield of 8%. The company is scheduled to go ex-dividend again in early September for 85 cents. Not bad for a bear market.