RAI Falls on Earnings Miss: Buy or Sell?

On a relatively quiet day for the market, shares of Reynolds American Inc. (RAI) are falling after the tobacco giant posted second-quarter results. Is Reynolds American running out of steam, or is this an opportunity to buy on the dip? Let’s dig into the details.

Compared with the year ago quarter, Q2 net sales jumped 33% to $3.2 billion. At the same time, net income was $796 million, which was lower than the $1.93 billion earned in Q2 2015.

However, much of last year’s earnings stemmed from the Lorillard Inc. acquisition in June 2015. Excluding one-time items, adjusted earnings per share rose nearly 14% to $0.58 per share. Analysts were calling for $0.61 EPS, so Reynolds American posted a 4.9% earnings miss.

RAI shares dipped on the earnings miss. Regardless, I consider RAI an excellent buy on the dip. The fact remains that Reynolds American still has strong prospects for FY 2016. For the fiscal year, management expects to earn between $2.25 and $2.34 per share. This represents between 14.1% and 18.2% annual earnings growth.

Reynolds American also remains committed to its shareholders. The company increased its quarterly dividend by 9.5% to $1.84 per share. This is the second dividend increase in 2016 alone. The company also announced a new $2.0 billion share repurchase program, to be completed over the next two years.

RAI is one of a few stocks that receive top marks in both Portfolio Grader and Dividend Grader. For these reasons, I recommend that you buy RAI on the dip.

Sincerely,

Louis Navellier

Louis Navellier

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