Tobacco giant Reynolds American (RAI) is the second-biggest cigarette maker in the country, with premium brands such as Camel, Kool and Natural American Spirits. Reynolds is a typical "sin stock," sporting recession-resistant sales and a sticky customer base and generating the cash to pay for a hefty dividend yield. Right now, that yield adds up to 5.11%.
Reynolds is a business in decline. Its customer base is dying a slow death (in a manner of speaking) as overall tobacco use declines in the U.S. Because the firm sold off its international rights to Japan Tobacco in 1999, high-growth markets in Southeast Asia and Latin America are off-limits to RAI. But if the U.S. tobacco industry is in a slow decline, "slow" is the operative word: It's contracting at less than 5% each year. With new initiatives like the Vuse brand of electronic cigarettes offering some hints at growth, Reynolds should maintain its cash-generation engine for the foreseeable future.
From a financial standpoint, RAI's balance sheet is in good shape, with $2.7 billion in cash offsetting a reasonable $6.2 billion debt load. Net margins consistently come in above the 20% mark, which means that management is able to hold on to a whole lot of each dollar that comes through the door. Expect a hike to RAI's 63-cent quarterly dividend payout.