The tobacco industry has gone through extensive consolidation recently, and most of the major acquisition activity in the U.S. market came when Reynolds American (NYSE: RAI) made its move to buy Lorillard in a $27 billion transaction that united the No. 2 and No. 3 players in the domestic tobacco market. Shortly after the merger was completed, Reynolds American split its stock, marking the third occasion in a decade that it had done so.
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Even though it has only been a year since the 2015 split, Reynolds American investors want to know whether they should expect a future move on top of the dividends the stock pays regularly. Let's take a look at Reynolds American's past stock splits to figure out if investors should expect another split in the near future.
Image source: Reynolds American.
Reynolds American stock splits
Data source: Reynolds American investor relations.
As you can see, Reynolds American has consistently used stock splits as part of its capital-structure strategy. Since 1999, Reynolds has given shareholders an impressive return on their investment, producing average annual gains of 24% over that time span.
When Reynolds American split its shares
Reynolds American's stock split strategy isn't as easy to figure out as with some companies. In 2006, the company made its first split, and that move looked similar to what you often see from other stocks. Once Reynolds American shares climbed above the $100 mark, that prompted a response from management to split the shares and produce a stock price in the $50s or $60s.
However, it didn't take long for Reynolds American to move away from that strategy. In 2010, the share price for Reynolds was just over $60 when the tobacco giant went through with the second stock split in its history, and in subsequent trading, Reynolds shares remained in the $30s for a full year before climbing higher. Similarly, in 2015, the stock price had hit the mid $80s, but even a full year later, it's still below $50. That suggests that a triple-digit share price wasn't necessarily in the cards -- even without a split.
Why did Reynolds split after the Lorillard deal?
Of the three splits, the one that makes the most sense from a fundamental standpoint is the 2015 stock split. That's because it came after the acquisition of Lorillard, when the size of the company had actually expanded greatly. The Lorillard acquisition involved part cash and part stock, and only about a quarter of the total compensation Lorillard shareholders got came in the form of new Reynolds shares. Instead, with Lorillard stock investors getting $50.50 in cash for every share they owned on top of a fraction of a Reynolds share, the size of Reynolds' balance sheet expanded disproportionately compared to the outstanding share count. Doing a split was an easy way to account for the impact of getting Lorillard under Reynolds' corporate umbrella.
The impact of the Lorillard deal has been huge for Reynolds. Revenue has climbed by roughly 50% since the deal went through, and the company's net income over the past 12 months is triple what it was prior to the deal. Admittedly, a big portion of the net-income gains are a result of one-time gains on the sale of assets that Reynolds had to divest as a condition of the deal. However, the revenue gains should persist, and Reynolds expects that its profits will be higher in the long run, and grow at a faster pace than if the Lorillard buyout hadn't happened.
Will Reynolds split again?
For now, with Reynolds shares in the upper $40s, it doesn't seem likely that the tobacco giant will do another split in the near future. It would probably take another big corporate move like an acquisition to justify a stock split. Eventually, though, Reynolds shareholders hope that the tobacco company will reap the rewards of its larger size and produce the returns in its stock that would lead to a future split.
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