Investment guide: British American Tobacco

British American Tobacco (BAT), was recently announced as the biggest JSE listed company for 2016. This guide looks at the performance of BAT and whether or not it is a good investment.

Stefan du Toit, a stockbroker at PSG Wealth Durbanville, noted that BAT is a leading international tobacco conglomerate with operations in more than 50 countries. The company’s portfolio consists of more than 200 brands, including Dunhill, Peter Stuyvesant, Vogue, Kent and Rothmans.

Is it a good investment?

Dale Hutcheson, senior investment analyst at Absa Asset Management, stated that BAT is a good investment as it is a solid well-managed business with some interesting opportunities in next generation products which will go some way to counter the long term negative volume trend in traditional tobacco products in developed markets.

“The company’s management is highly regarded and is known for creating shareholder wealth. BAT continues to look for opportunities to increase market share and efficiencies and is currently in the process of buying the remaining 58% of Reynolds American for $47 billion (about R638.01 billion), which will create the world’s largest listed tobacco company. With BAT’s current scale, geographical diversification and pricing power, it remains a quality company and deserves a place in most portfolios,” said du Toit.

Hutcheson added that BAT also has a large exposure to some emerging markets which are still seeing growth in traditional tobacco products. Management is also very confident that the current acquisition of Reynolds will deliver synergy benefits and is expected to be earnings accretive.

Competitors

According to du Toit, BAT has no direct competitors on the local market. However, internationally BAT’s biggest competitors are Reynolds American, Phillip Morris, China National Tobacco Company, Japan Tobacco International, Altria Group and Imperial Brands.

When it comes to considering similar consumer businesses BAT is sometimes compared to Anheuser-Busch InBev, the other large global consumer staples company listed on the JSE, or other large Rand hedge stocks. “Investors may also choose to take an exposure to BAT through investing in Reinet as BAT represents 65% of Reinet’s net asset value,” says Hutcheson.

Stock performance

Du Toit pointed out that over the past 12 months BAT’s share price was flat, with a dividend yield of 3.13%. He explained that this is due to a number of factors, which include the weakening of the Pound against the Rand.

Hutcheson pointed out that there was a marginal increase in the BAT share price over the past year. However, he emphasised that this reflects the fact the Rand strengthened over this period. “If we look at BAT listed in London in Pound terms the share is up around 25% for the year, although this probably overstates underlying performance given Pound weakness post the Brexit vote.”

Tips for investors

The tobacco industry is highly competitive and thus market share and volumes are important, revealed du Toit. It is important to have the necessary scale and geographical diversification to maintain healthy margins, reasonable return on equity and good cash generation.

“With overall tobacco volumes declining it is important to invest in next generation products to ensure future profits for the company. As a result, BAT has been on a strong investment drive in to the next generation vapour brands, and now has a presence in the largest vapour markets outside the US,” noted de Toit.

“When considering an investment in BAT your returns will be significantly impacted by currency movements and therefore the investment in BAT should be considered in conjunction with your currency expectations,” said Hutcheson.

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