Reynolds is the maker of cigarettes and is a great source of cashflow for a portfolio.

Reynolds American Inc. is the old R.J. Reynolds tobacco company.  This company is interesting in many ways.  To begin with you have to first get over any person obstacles of the company being a tobacco company and look at it from the perspective of being a business.  The company’s earnings have been steady but should be moving higher.

Published over a year ago
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Reviewed by Rifka Kats

If you do not mind the product itself, cigarettes, Reynolds is a cash flow generating company.  Thier price is a little bit high at this moment but any moves lower in the equity markets and you would want this stock in your portfolio as they consistently bring in revenue and earnings. 

How important is Reynolds American's Liquidity

Reynolds American financial leverage refers to using borrowed capital as a funding source to finance Reynolds American ongoing operations. It is usually used to expand the firm's asset base and generate returns on borrowed capital. Reynolds American financial leverage is typically calculated by taking the company's all interest-bearing debt and dividing it by total capital. So the higher the debt-to-capital ratio (i.e., financial leverage), the riskier the company. Financial leverage can amplify the potential profits to Reynolds American's owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if the firm cannot cover its debt costs. The degree of Reynolds American's financial leverage can be measured in several ways, including by ratios such as the debt-to-equity ratio (total debt / total equity), equity multiplier (total assets / total equity), or the debt ratio (total debt / total assets). Please check the breakdown between Reynolds American's total debt and its cash.

Breaking down Reynolds American Indicators

Reynolds American Inc. is the old R.J. Reynolds tobacco company.  This company is interesting in many ways.  To begin with you have to first get over any person obstacles of the company being a tobacco company and look at it from the perspective of being a business.  The company’s earnings have been steady but should be moving higher.  Here, we can see the past few year’s worth of revenue, income and  earnings-per-share laid out:

2011:   $8,541.0 $2,447.0 $2.41

2012: $8,304.0 $2,492.0    $2.25  

2013: $8,236.0 $3,103.0    $3.15 

2014: $8,471.0 $2,654.0    $2.76  

2015: $10,675.0 $7,076.0    $2.57  

Given this earnings listing and where I like to look for potential investments, the stock is trading at $50 per share.  That is nearly 20-times earnings.  But, this is a company that I have my eye on for a few reasons and I will explain.  

First, I am a firm believer that the equity market is going to come down to a more realistic earnings per share ratio.  That will allow for a better entry opportunity.  The current overall price-to-earnings ratio is too rich historically; the ratio is trading at 26 whereas normally it is 15.  So, a stock that is trading at a 20-times earnings should come down proportionally and offer an opportunity around the 12-times earnings.  This kind of company is something that tI like with regards to a long-term holding.  This company is predictable and consistent.  

This is the kind of company that you are looking for when it comes to creating long term wealth and income.  It is because of their predictability that this company is so attractive to me with regards to putting it in my own portfolio.  But, I will only do so at a price that makes sense, and just about no prices make sense right now.  The price-to-earnings ratio is too rich to be sensible; 26 is far too high.  

I have been diligently putting together a list of stocks that I will be adding in to my own portfolio when the market comes back down to better prices, once the euphoria of the Republican election wears off.  I am looking to add this company into my portfolio because it can profile an earnings and dividend that will make for a long-term retirement holding.  

One of the things that does stand out to me from the list above is the revenue from 2014 - 2015.  That is a huge jump.  There was another huge leap in the operating profits.  However, there was a slight drop in earnings-per-share.  This is more of a one-off than anything and it is my belief that the company’s numbers will realign themselves with what they have been doing over the past few years.  In the meantime, the moves have allowed for the company’s stock to position itself to head much higher should the revenue continue to increase as it has.  Given the bigger revenue jumps the company will be well positioned to increase its earnings potential on a per-share basis.  This will push the company’s stock up significantly.

Certainly there are some out there that will not want to get involved in a company that deals with the products that Reynolds does.  Others will be able to see this company as it is, yet another business that trades on the stock exchanges.  There is really, long-term opportunity here.  I am considering this stock for my own portfolio.  I will be doing so when the stock move down in price, but keeps its earnings continually moving higher.  The overall equity market is too high, it will be coming down.  That would be a good time to pick up more of this stock.

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Editorial Staff

This story should be regarded as informational only and should not be considered a solicitation to sell or buy any financial products. Macroaxis does not express any opinion as to the present or future value of any investments referred to in this post. This post may not be reproduced without the consent of Macroaxis LLC. Macroaxis LLC and David Taylor do not own shares of Reynolds American. Please refer to our Terms of Use for any information regarding our disclosure principles.

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