Reynolds, Tobacco Stocks Light Up Amid Merger Rumors


Tobacco stocks have lit up recently amid increasing speculation over potential mergers among the industry's players.

The group has edged up to No. 169 from No. 190 six weeks ago among IBD's 197 industry groups, as a Citigroup report Monday suggestedReynolds American ( RAI ) could enter a joint venture with or be a takeover target forBritish American Tobacco ( BTI ).

The British company already owns a 42% stake in Reynolds, whose cigarette brands include Camel and Pall Mall. Other products include snuff and electronic cigarettes.

Last week, the Financial Times reported that Reynolds hired an investment bank to explore a possible buyout ofLorillard ( LO ). Both companies have declined to comment, but Reynolds surged 11% and Lorillard 13% in the two days following the report.

Reynolds' fourth-quarter sales dipped 2% vs. a year ago, as revenue has been mostly flat to lower the past 13 quarters. Its RJR Tobacco unit's Q4 cigarette shipments fell 8.6% from the prior year, as cigarette industry volume slid 6.2%.

The company seeks to offset slowing sales of traditional tobacco products with its VUSE Digital Vapor Cigarette, which Reynolds says is performing well. It's available in Colorado and is now expanding into Utah.

Profit growth slowed to 1% in Q4. But it has maintained small, steady annual EPS gains the past four years, which analysts expect to continue at 6% this year and 8% the next. That helps it earn a three-year Earnings Stability Factor of 1 on a scale of zero (most stable) to 99 (most volatile).

The cigarette maker has rolled out dividends every quarter since its 2004 IPO. Its most recent payout of 67 cents per share represents a 6% increase and brings its annualized yield to $2.68, or 5%. That's more than double the S&P 500's 1.86%.

The stock sits 3% above a 52.67 cup-base buy point, which it cleared March 3.

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: Personal Finance , Investing Ideas

Referenced Stocks: RAI , BTI , LO

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