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Why Is Reynolds American Increasing Capital Expenditure?

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Oct. 8 2015, Updated 11:07 a.m. ET

Capital expenditure overview

Reynolds American (RAI) is a leading tobacco manufacturing company in the United States. Reynold American’s capital expenditure for 2014 increased 33.3% to $0.20 billion, compared with $0.15 billion in 2013. The company’s capital expenditure as a percentage of sales increased to 2.4% in 2014, compared with 1.9% in 2013.

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Reasons for increase

Capital expenditure increased primarily due to higher expenditure on expanding production capacity of VUSE. In 2014, capital expenditure for R. J. Reynolds Tobacco Company and American Snuff Company came in at $0.053 billion and $0.012 billion, respectively.

Capex-to-sales versus peers’

In 2014, Reynolds American, British American Tobacco (BTI), and Philip Morris International (PM) had higher capex-to-sales at 2.4%, 3.8%, and 3.9%, respectively. However, capital expenditure as a percentage of sales for other companies like Altria Group (MO), Imperial Tobacco Group (ITYBY), and Vector Group (VGR) came in at 0.9%, 1.9%, and 2.0%, respectively, in 2014[1. Fiscal year end for Imperial Tobacco is September 30, while for others it is December 31].

Expected expenditures in 2015

In 2015, Reynolds American’s operating subsidiaries plan to make additional capital investments to further support the expansion of VUSE. The company expects capital expenditures on non-discretionary business requirements to be in the range of:

  1. $0.085 billion to $0.095 billion for R. J. Reynolds Tobacco Company
  2. $0.01 billion to $0.02 billion for American Snuff Company
  3. $0.015 billion to $0.025 billion for Santa Fe Natural Tobacco Company

The company’s also focusing on strengthening its cigarette manufacturing and distribution facilities to meet consumer demand. Reynolds American has exposure to the iShares Dow Jones US ETF (IYY) with 0.2%[2. Updated as on September 23, 2015] of the total weight of the portfolio.

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