Saturday, July 22, 2017

Recent Sell: Reynolds American

On 19 July 2017, the Winston-Salem-based tobacco company, Reynolds American, Inc (RAI), announced that shareholders approved the acquisition of RAI by British American Tobacco plc (LON:BATS). The transaction is expected to complete on or about 25 July 2017.

The deal comprises a cash payment of $29.44 per RAI share, plus American Depositary Shares (BTI) equal to 0.526 of an ordinary BATS share.

The merged company will become the world’s largest publicly traded tobacco entity. BATS projects annual savings of about $400 million from operational cost-cutting, higher purchasing power, and supply-chain efficiencies. To fund the deal, BATS plans to add about $38 billion of debt on top of existing debt totaling $22 billion.

On the day of shareholder approval, shares of BTI closed at $69.40 per share. This means that BTI's offer equated to $29.44 + ($69.40 × 0.526) = $29.44 + $36.50 = $65.94 per share.

Good Bye, RAI


RAI is DivGro's most successful investment to date. The stock is DivGro's fifth home run stock, a designation I assign to stocks that return 100% of my initial investment. In fact, RAI has returned 180% of my initial investment, or 53% on an annualized basis.

So, why am I saying Good Bye to RAI?

My main reason for selling RAI is that I don't like owning ADRs of companies that pay dividends in foreign currency. Due to foreign exchange rate volatility, such dividends are not guaranteed to increase over time.

BATS dividends and their ADR counterpart (paid in US$) provide a good example of this phenomenon. Consider the following table showing BATS' dividend payments (in British pence):


Source: Stockopedia

Clearly, the stock has a track record of 18 consecutive years of paying higher dividends. Notice that the BATS dividends have been paid semi-annually, which is typical of many foreign dividend-paying stocks. Notice also the pattern of paying a smaller interim dividend and a larger final dividend.

When converted to ADR shares (BTI, paid in US$), the dividends have not increased every year during the 18 year period. Specifically, due to the strength of the US$ since 2014, the US$-equivalent dividend has decreased by nearly 8%:

Data Sources: Stockopedia and Dividend.com

The fact that BATS pay dividends semi-annually, with uneven interim and final payments, is another thing that I don't like about foreign dividend paying stocks. However, the company announced that it will be moving to a schedule of four interim quarterly dividend payments in 2018.

The dividend will be announced in February 2018 when the company announces its preliminary results for the year ending 31 December 2017. Quarterly dividends will be paid in four equal installments in May, August, and November 2018, and February 2019.

Transaction Summary


On 19 July 2017, I sold my remaining 100 shares of RAI for $65.45 per share. My net gain is 180.3% on the original amount invested, or 52.9% annualized:

2010-09-07Bought: 19.97245 shares of RAI at $28.82 per share:$575.61
2010-10-01 Dividend on 19.97245 shares at 45¢ per share: $8.99
2011-01-03 Dividend on 19.97245 shares at 49¢ per share: $9.79
2011-04-01 Dividend on 19.97245 shares at 53¢ per share: $10.59
2011-07-01 Dividend on 19.97245 shares at 53¢ per share: $10.59
2011-10-03 Dividend on 19.97245 shares at 53¢ per share: $10.59
2012-01-03 Dividend on 19.97245 shares at 56¢ per share: $11.18
2012-04-02 Dividend on 19.97245 shares at 56¢ per share: $11.18
2012-07-02 Dividend on 19.97245 shares at 59¢ per share: $11.78
2012-10-01 Dividend on 19.97245 shares at 59¢ per share: $11.78
2013-01-02 Dividend on 19.97245 shares at 59¢ per share: $11.78
2013-04-01 Dividend on 19.97245 shares at 59¢ per share: $11.78
2013-07-01 Dividend on 19.97245 shares at 63¢ per share: $12.58
2013-10-01 Dividend on 19.97245 shares at 63¢ per share: $12.58
2014-01-02 Dividend on 19.97245 shares at 63¢ per share: $12.58
2014-04-01 Dividend on 19.97245 shares at 67¢ per share: $13.38
2014-07-01 Dividend on 19.97245 shares at 67¢ per share: $13.38
2014-09-09Bought: 23.6783 shares of RAI at $57.31 per share:$1,357.00
2014-10-01 Dividend on 19.97245 shares at 67¢ per share: $13.38
2015-01-02 Dividend on 43.65075 shares at 67¢ per share: $29.25
2015-04-01 Dividend on 43.65075 shares at 67¢ per share: $29.25
2015-07-01 Dividend on 43.65075 shares at 67¢ per share: $29.25
2015-07-01 Dividend on 43.65075 shares at 67¢ per share: $29.25
2015-09-01 2-for-1 stock split; 43.65075 shares added:
2015-10-01 Dividend on 87.3015 shares at 36¢ per share: $31.43
2016-01-04 Dividend on 87.3015 shares at 36¢ per share: $31.43
2016-02-17Bought: 12.6985 shares of RAI at $49.01 per share: $622.35
2016-04-01 Dividend on 100 shares at 36¢ per share: $36.00
2016-07-01 Dividend on 100 shares at 42¢ per share: $46.00
2016-10-03 Dividend on 100 shares at 46¢ per share: $46.00
2017-01-03 Dividend on 100 shares at 46¢ per share: $46.00
2017-04-03 Dividend on 100 shares at 51¢ per share: $51.00
2017-07-03 Dividend on 100 shares at 51¢ per share: $51.00
2017-07-19Sold 100 shares of RAI at $65.45 per share:$6,545.00
Capital gain:$3,990.04
Dividends received:$619.72
Commissions/fees/taxes:$3.00
Net gain:$4,606.76

Conclusion


RAI is DivGro's most successful investment so far, so I'm a little sad to see it go.

I decided to sell my RAI shares rather than exchange them for cash and some BTI shares, mainly because I don't like that BTI's dividend is issued in a foreign currency. As shown above, increasing dividends in a foreign currency do not necessarily translate into increasing dividends in US$.

Closing my RAI position removes $204.00 from DivGro's projected annual dividend income.

Thanks for reading! 

Do you own RAI shares? Are you going to sell your shares, or take the deal offered by British American Tobacco? Please let me know in the comments below.

5 comments :

  1. Hey FerdiS,

    all in all i really like that sell of RAI. Your net gain is out of the park...and getting cash and some BTI shares in exchange wouldn't be my choice either. 204$ of income is no small amount, but with over 6k to invest you can compensate that. - personally i don't own any tobacco stocks. I think they were great businesses in the past but i'm not convinced they'll be in the future. And right now, some of them seem overvalued to me.

    Best Regards,
    DividendSolutions

    ReplyDelete
    Replies
    1. Hi, DividendSolutions -- thanks for visiting and commenting!

      I'm happy with the net gain and, as you say, over $6k to invest in a new stock... not bad. The tobacco stocks have done really well over the years, but I think you're right about their future prospects. Not so sure they'll continue to do well.

      Take care and happy investing!

      Delete
  2. Despite selling an investment that has given such a nice return, I do think that you sold it for a good reason. It is good to take some profits sometimes. Now you have some fresh capital to deploy on your next home run investment. Great job and thanks for sharing.

    ReplyDelete
    Replies
    1. Hi, More Dividends -- I'm very happy with the returns and how things turned out. Unfortunately, i'm giving up $204 in dividend income, but I think I can find some suitable replacement with the profits!

      Thanks for visiting!

      Delete
  3. I think tobacco stocks have had a good run, but the growth story is ending as global population growth slows and people get woke about the fact that cigarettes kill you.

    Foreign currency dividends are a headache too. Completely agree with this decision all the way around.

    ReplyDelete

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