Filed Under:
Tickers in this Article: RAI, BTI, BEN, PM, OTC:ITYBY.PK
With stock markets continuing to fall ever nearer 2008 levels, investors around the world are stressing out. Many who gave up smoking years ago are probably contemplating picking up the nasty habit at this point, because it and alcohol probably seem like the only things that'll calm rattled nerves. I'm being facetious, of course, but cigarette companies like Reynolds American (NYSE:RAI), long known for its ability to generate huge amounts of free cash flow, are great harbors of safety in times of volatility. If you can stomach owning a stock whose products kill people, you'd be crazy not to park some of your money with the maker of Pall Mall and Camel cigarettes. TUTORIAL: Economic Indicators To Know

Its annual dividend is currently yielding more than 6% - one of the highest yields on the S&P 500. Since 2000, it's raised its annual dividend every year except 2004, when R.J. Reynolds Tobacco Holdings merged its U.S. tobacco business with British American Tobacco's (NYSE:BTI) U.S. operations. It's a dividend darling for sure. In 2011, it increased its dividend 15.2% to $2.12. In the past five years, it's cumulatively increased dividends 53.6%, paying out approximately 87% of its earnings to shareholders. With $1.3 billion in cash on its balance sheet, it shouldn't have any problem continuing to raise the dividend. You can't beat it for inflation protection.

Stock Performance
With increasing dividends usually come positive total returns. Since 2001, its annual return is 13.9%, 1,200 basis points better than the S&P 500. Its dividend yield in that time has varied from a low of 4.2% in 2006 to a high of 8.9% in 2002. With today's volatility, I'd be more than willing to accept a 4.2% dividend yield. Especially when you consider that Reynolds American's total return has beaten the S&P 500 in each of the last 10 years and is working on an 11th. Interestingly, it has underperformed its tobacco peers in four of the last 10 years. It's for this reason some of America's best investors continue to hold its stock. The potential is there to do even better.

Wintergreen Fund
Are you familiar with this fund? David Winters, former chief investment officer of Franklin Mutual Advisers, a part of Franklin Resources (NYSE:BEN), went out on his own in 2005, establishing Wintergreen Advisers in October of that year. In conjunction with the opening of his own investment management firm, he launched the Wintergreen Fund. Assets under management are $1.44 billion as of March 31, 2011. Mentored by Michael Price, his skills as a portfolio manager are exemplary. Since inception, the fund's annualized return is 7.54%, or 432 basis points higher than the S&P 500. He's held Reynolds American's stock ever since the fund opened, and as of the end of the first quarter he owns 907,414 shares. That's commitment. In general, Winters likes tobacco companies, which account for 15.5% of the fund's overall holdings. For those not completely sold on Reynolds American, he also owns Philip Morris International (NYSE:PM), Imperial Tobacco (OTCBB:ITYBY), British American Tobacco and Japan Tobacco, which bought Reynolds' international business in 1999.

The Bottom Line
If you can get past the images pasted on cigarette packages, which isn't an easy thing, you shouldn't have any problem buying this stock. It's a core holding for sure. (For additional reading, see Sinful Investing: Is It For You?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center