Reynolds American Merger With Lorillard Good News For Dividend Investors

Firms in the tobacco industry have significant pricing power, generate high margins, and have strong returns on invested capital, making them attractive growth opportunities. Already boasting significant control of said market, Reynolds American (NYSE: RAI) is looking to continue its growth after acquiring the third largest manufacturer of cigarettes in the US, Lorillard (NYSE: LO). The proposed merger received US Federal Trade Commission clearance May 26, but it is still subject to certain other conditions. Both companies expect the deal to be closed by the end of June.Following the acquisition, Reynolds American expects to reach $11 billion in revenue--the firm reported ~$8.5 billion in 2014--and ~$5 billion in operating income. This is a significant figure when considering the most recent full year reported number of ~$2.5 billion in operating income. The significant cost synergies should help drive free cash flow higher, in turn increasing the potential for dividend expansion.Reynolds American also plans to sell $7.1 billion worth in cigarette brands, assets and liabilities to Imperial Tobacco (ITYBY). It expects to realize a profit of ~$4.4 billion after taxes. The expected increase in future free cash flows related to the Reynolds-American/Lorillard tie-up will be necessary for RAI's Dividend Cushion ratio, since its net debt position before the merger is over $4 billion. As of the most recent update, it receives a rating of GOOD with a score of 1.2. We... Read more