We maintained our Neutral recommendation on Reynolds American Inc. ( RAI - Analyst Report ) following the appraisal of the second quarter 2012 results.

The company continues to face certain restrictions imposed by governments around the world to reduce smoking in the respective countries. Moreover, increased promotional activities by competitors are posing threat to the company’s biggest brands like Pall Mall and Camel. For example, Reynold’s biggest peer Altria Group Inc. ( MO - Analyst Report ) has been busy with several innovative launches and marketing campaigns of Marlboro.

These competitive actions by Altria have considerably dented Pall Mall and Camel’s market share for several quarters. Reynolds does not seem to have any near-term corrective measure to combat the competition.

Reynolds’ net sales in the second quarter of 2012 declined 4.0% year over year to $2.2 billion due to declining cigarette volumes. Quarterly net sales also missed the Zacks Consensus Estimate of $2.3 billion.

Revenues from Reynolds American’s largest operating segment comprising operations of R. J. Reynolds Tobacco Company, a subsidiary of Reynolds American, declined 6.5% year-on-year to $1.83 billion in the second quarter. Volume and market share also declined due to soft results of Camel and Pall Mall.

However, we are encouraged by the company’s commitment to stimulating demand through new and innovative product launches. Moreover, smokeless category is showing a possibility of growth in the US market. Santa Fe’s Natural American Spirit (NAS) brand is the only United States Department for Agriculture (USDA) certified organic cigarette in the world.

Moreover, we remain confident about management’s continuous endeavor to enhance shareholder value through dividend payments. In May 2012, the company’s board of directors approved a quarterly cash dividend of 59 cents per share, reflecting 5.4% hike on the previous payout.

This is the ninth dividend increase of the company since its inception in 2004. The incessant dividend hike is encouraging as it indicates improving profitability. We believe that this could ultimately boost investor loyalty.

Reynolds American currently retains a Zacks #2 Rank (Buy rating).

Headquartered in Winston-Salem, NC, Reynolds American, Inc. is a leading cigarette and smokeless tobacco product manufacturer. Its subsidiaries include R. J. Reynolds Tobacco Company (RJR), American Snuff Company, LLC, , Santa Fe Natural Tobacco Company, Inc.; and Niconovum AB.