Reynolds American Rally Does Nothing to Build Shareholder Value

| About: Reynolds American, (RAI)

Let me begin by saying that I’m a fan of Reynolds American (NYSE:RAI). I like the stock and I especially like the current dividend yield of 6.1%.

However, the stock is rallying today on the news of a very strange press release. The company has announced that it’s raising its dividend target from 75% of earnings to 80% of earnings.

The title of the press release is: “Reynolds American increases target on dividend payout to further enhance shareholder value.” Yes, but raising the dividend payout has zero impact on shareholder value. It just changes how shareholders are paid. (Note, for example, that this headline is flat out wrong.)

The company isn’t boosting its dividend right now (shareholders got an increase recently when the stock split). It is merely making a small adjustment to what it plans to pay. If RAI’s earnings fall, so will its dividend. If the earnings rise, so will the dividend. The payout ratio has zero bearing on the share price.

Reynolds currently pays a dividend of 49 cents per share. That comes to $1.96 per share a year. If that’s 75% of projected earnings, then the board sees EPS coming in at $2.61. At an 80% payout rate, the dividend would then be about 52 cents per share. I’m assuming the new payout ratio won’t be in effect until next year when the new dividend is announced. The last dividend increase was announced this past October. Today’s “news” barely qualifies to be a footnote.

Shares of RAI are up today while most of the market is down. I’m happy to see the stock rally but today’s news does nothing to build shareholder value.

Disclosure: Author holds a position in RAI.