Reynolds Center Of Takeover Speculation

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Reynolds American, the No. 2 U.S. tobacco company, has been at the center of speculation regarding consolidation in the industry.

At aGoldman Sachs ( GS ) conference in New York on Tuesday,Reynolds American ( RAI ) CEO Susan Cameron dodged a question about what might be in store. One rumor making the rounds has it that U.K.-based British American Tobacco (BAT) would like to increase its 42% stake in Reynolds after a 10-year standstill agreement expires in July. The agreement was to prevent a hostile takeover of Reynolds.

Another rumor is that Camel-maker Reynolds is trying to buyLorillard ( LO ).


The rumors moved the stocks Monday following a Times of London article on speculation regarding the BAT takeover attempt.

Reynolds broke out of a flat base on the report, although volume was only 22% above average. Lorillard had already broken out and is holding a few percentage points above its buy point.

The big effort today in the tobacco industry is the development of e-cigarettes, which are smokeless. The FDA recently said that it would regulate them, a move that the industry's big players welcomed.

Tobacco companies are slow growers, and Reynolds is no exception. It has four straight years of earning growth, but analysts expect only a 5% EPS increase in 2014 and an 8% increase in 2015.

The five-year annualized growth rate is 7%, although the Earnings Stability Factor is 2 on a 0 to 99 scale where low numbers correspond to steady earnings growth.

Earnings in the most recent quarter were flat vs. a year ago. Analysts expect a 4% increase in the next report.

Reynolds pays a dividend equal to $2.68 cents a share, which comes out to a 4.6% annual yield. It's growing at a three- to five-year rate of 10%.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Investing Ideas

Referenced Stocks: GS , RAI , LO

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