Bat for BAT

Buy be­fore March and kill two (no, ac­tu­ally three) birds with one stone

Finweek English Edition - - MONEY CLINIC - VIC DE KLERK vicd@fin­

IN­TER­EST RATES ARE LOW for in­vestors – shock­ingly low. In­vestors with sur­plus cash, and there are many of them, are cur­rently earn­ing only about 5%/year with ex­tra funds in­vested in JSE Trustees. And then the bro­kers also still take one per­cent­age point of that as a man­age­ment fee.

Three chal­lenges – low in­ter­est and cash div­i­dends, cer­tain share prices that have al­ready run far too far and the strong rand – are forc­ing con­ser­va­tive in­vestors to take an­other look at Bri­tish Amer­i­can To­bacco (BAT). Since its sep­a­rate list­ing in Novem­ber 2008, BAT has been a great dis­ap­point­ment to South African in­vestors. Ev­ery­thing else has done bet­ter: the Sa­trix 40 was a far bet­ter choice, the Sa­trix Indi still bet­ter, and even plat­inum and gold shares re­warded in­vestors more.

It’s pre­cisely be­cause of the poor per­for­mance of the old big gun – mar­ket value of more than R550bn – that the time has come to take an­other look at it, es­pe­cially if the in­vestor wants to ad­dress the three chal­lenges men­tioned above.

BAT’s fi­nan­cial year-end was 31 De­cem­ber 2010 and in­vestors can start spec­u­lat­ing now about its fi­nal div­i­dend, which will be de­clared in March. Last year it was 861,50c/ share. But that was last year, when ster­ling (in which BAT de­clares its div­i­dends) stood stronger when com­pared with the rand. Let’s be con­ser­va­tive and put the fi­nal div­i­dend at 800c/share in SA.

The an­a­lysts’ con­sen­sus view is that BAT will declare a lo­cal div­i­dend of around 1450c to 1500c for its next fi­nan­cial year. Let’s be con­ser­va­tive again and go for 1400c/share. Cash flow prospects for the in­vestor are sim­ple: buy BAT over the next month or two – say at R260 apiece, or less – and you’ll re­ceive a div­i­dend yield of 8,5% over the next 13 to 15 months, depend­ing on when you buy the share.

That’s much bet­ter than the tax­able in­ter­est of 5% you’re cur­rently earn­ing on JSE Trustee, not for­get­ting that the bro­kers will still take their share. The 8,5% div­i­dend yield is prob­a­bly not all you’ll earn on the in­vest­ment. Even if it may be very mod­est, in­vestors can also ex­pect BAT’s share price to in­crease by 5% or even more over the next year – in both ster­ling and rand.

Let’s be a bit more spe­cific and pre­dict an in­crease of 6,5%. That means it will go up from its cur­rent R260 to R277 over 15 months. The cash div­i­dend of 8,5% and a 6,5% in­crease in the cap­i­tal will give the in­vestors a very safe 15% over the next 14 months or so. That’s a whole lot bet­ter than that measly lit­tle in­ter­est rate, which is also still go­ing to be taxed.

In­vestors dis­ap­pointed about BAT’s poor per­for­mance over the past two years shouldn’t judge BAT too harshly. Re­mem­ber that over the past five years its share price fared much bet­ter than the FTSE 100, the top 100 shares on the London Stock Ex­change. BAT’s graph ver­sus the FTSE over the past five years tells its own tale.

Un­for­tu­nately, BAT’s share price of­ten suf­fers at the hands of the un­in­formed and due to mis­con­cep­tions. Jo­hann Ru­pert – head of Reinet, which has most of its as­sets in BAT – has of­ten pointed out BAT isn’t a Bri­tish com­pany nor does it op­er­ate in ster­ling. Ster­ling and the London ad­dress are sim­ply where it all comes to­gether: its ac­counts of­fice.

BAT’s busi­ness dis­tri­bu­tion and con­tri­bu­tion, in terms of turnover and profit, are as fol­lows:

Asia-Pa­cific: 25% turnover and 26% profit. Western Europe: 25% and 22%. East­ern Europe: 10% and 5%. Africa and the Mid­dle East: 15% and 18%.

For ex­am­ple, SA has long been con­tribut­ing less than 5% to the group’s turnover and profit. And all the noise about BAT’s plant at Hei­del­berg – where 200 jobs may be lost due to new Govern­ment reg­u­la­tions – is ir­rel­e­vant in the larger group of more than 60 000 jobs world­wide. South African in­vestors also buy BAT plc, the big one on the JSE, not the lit­tle BAT SA Fin­week re­ported on late last year.

Buy BAT for the sake of its good div­i­dend and if the rand per­haps tum­bles from its throne, it will also of­fer you good pro­tec­tion. Even with­out a weaker rand the to­tal re­turn for in­vestors who buy in now will prob­a­bly be around 15% or more over the next 12+ months – and the greater por­tion of that will be in cash.

De Klerk holds shares in BAT

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