A Smoking-Hot Dividend

06/21/2010 1:04 pm EST

Focus: STOCKS

Louis Navellier

Editor, Blue Chip Growth and Emerging Growth

Louis Navellier, editor of Blue Chip Growth, likes the calming effect of Reynolds American’s 6%+ yield in these troubled times.

The major worries for investors now seem to be (1) the “euro crisis” centered in Greece but in danger of spreading to the Iberian Peninsula; (2) China’s inflationary boom threatening to collapse into a deflationary bust, similar to what happened to the West in 2008; and (3) the Goldman Sachs investigations on Capitol Hill.

I believe that the first two dangers actually are good news for the US stock market. Troubles elsewhere will help us outperform Europe and Asia, supporting the US bond, currency, and stock markets as a safe haven for investors. As for the Goldman Sachs controversy, that is a speed bump on Wall Street but a non-event to most Americans.

During this unprecedented period of instability in Europe, along with the recent triple-digit market swings that we’ve seen in the Dow Jones index, it’s a good time to take a closer look at the importance of dividends Dividends are one of the oldest and most basic ways for a company to communicate that it is healthy.

Reynolds American (NYSE: RAI) is a large-cap stock that yields a hefty 6.7% dividend yield, which is just one of the reasons I’m adding it to our Blue Chip Buy List. Now the second-largest tobacco manufacturer in the United States, RAI was created from the merger of R.J. Reynolds Tobacco Holdings and Brown & Williamson.

R.J. Reynolds was facing increasing competition and needed to cut its operating costs. So it convinced Brown & Williamson, then the third-largest tobacco producer, to agree to a merger. This combined company still trails Altria Group (NYSE: MO), which controls about half of the US tobacco market. Still, Reynolds American’s RJR Tobacco unit boasts five of the 10 best-selling brands of cigarettes in the US, namely Camel, Kool, Pall Mall, Doral, and Winston. Brown & Williamson’s former parent, British American Tobacco (AMEX: BTI), owns about 42% of the company’s outstanding stock.

In the first quarter, the company’s net income was $85 million compared with $8 million during the same period in 2009. Net sales for the period were $1.98 billion compared with $1.92 billion the year before. Excluding extraordinary items, the company’s operating earnings were $1.11 per share, beating analysts’ estimates of $1.07 per share and providing a 3.7% earnings surprise! Looking forward, the company reaffirmed its year-end 2010 earnings forecast of between $4.80 per share to $5 per share from continuing operations.

Now there are many new tobacco regulations impacting RAI. Despite its stellar first-quarter report, Reynolds American sold 2.5% fewer cigarettes compared with a year earlier. Retailers and wholesalers cut their orders ahead of a one-time federal tax on inventory. Adjusting for these inventory cuts, total cigarette volume for Reynolds declined 4.8%. That’s versus a worldwide decline of 7.3%, so RAI is taking a smart approach to navigating the regulations. And despite selling fewer cigarettes, Reynolds produced a year-over-year increase in first-quarter sales overall. With its positive earnings growth and an impressive 6.7% dividend yield, the company is an attractive stock for conservative investors.

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