British American Tobacco: old stalwart of JSE
FOR AS LONG as I can remember, British American Tobacco (BAT) was a favourite of investors. You could bank on it to create wealth if you had shares.
In May 2016, BAT shares reached a high of more than R900. Since then the stock has struggled to the disappointment of shareholders.
When it reached R450 last month, investors lost confidence. It is now trading around R517 and it seems to have turned the corner.
BAT offers a product that has traditionally demonstrated resilience in times of economic uncertainties as it has a strong economic moat and enjoys high brand loyalty.
It remains an excellent company with a well-balanced portfolio of brands that cover all major price points from a world-class portfolio of cigarette brands and potentially reduced-risk products such as vapour, tobacco heating products, oral tobacco and moist snuff.
BAT boasts of geographic diversity with market dominance in over 55 countries and factories in 42 countries.
Recently, the group broadened its brand focus by investing in Reynolds American Incorporated (RAI) and gained a material portfolio of reduced risk products. It has established a portfolio of priority brands – the Strategic Portfolio – to replace the Global Drive Brands following the growing importance and progress of potentially reduced-risk products.
The strategic portfolio consists of three sections:
Previously known global drive brands that comprise Kent, Dunhill, Lucky Strike, Pall Mall and Rothmans.
Three leading brands from the US combustibles business: Camel, Newport and Natural American Spirit.
A potentially reduced-risk products portfolio, which includes the NGP business of THP, vapour, snus and moist snuff brands.
Investing in BAT is not entirely without risk. There are increased competitions from illicit trade, unexpected and significant excise duties, ever-changing litigation, disputed taxes, interest, penalties, and adverse foreign exchange rate movements which remain a risk.
The recent acquisition resulted in a significant increase in their debt. However, their stable volumes, good margins and consistent healthy cash generation, contribute to our view that gearing is manageable.
In December, BAT issued a trading update which the market didn’t particularly enjoy and the share price came under renewed pressure.
However, chief executive Nicandro Durante was quite upbeat, saying BAT remained on track for a strong performance.
In the US, they are performing well, with favourable pricing and continued value share growth.
The deleveraging remains on track, and they stay committed to a dividend payout ratio of at least 65 percent. They expect to exceed their high-single figure adjusted diluted earnings per share growth at constant rates of exchange.
He further said: “We believe excessive concerns over FDA regulations is an opportunity to add to BAT’s position as the market reappraises its solid free cash-flow profile and new generation product upsides.”
BAT is currently trading at a desirable forward price/earnings ratio of 7.95 times (3.3 standard deviations below its five-year average), and a solid forward dividend yield of 7.9 percent also support the share price.
Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. BAT shares are held on behalf of clients.