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