British American Tobacco p.l.c. (BTI) provides cigarettes and other tobacco products worldwide. It manufactures vapor and tobacco heating products; oral tobacco and nicotine products, such as snus and moist snuff; cigars; and e-cigarettes.
The company is
an international dividend achiever, which has managed to reward shareholders
with a dividend increase every year since 1997.
Some of BTI's
competitors include Altria Group (MO), Phillip Morris International (PM) and
Japan Tobacco.
Earnings per share
increased from 1.23/share in 2009 to 2.79/share in 2020. The 2017 figures have
been adjusted for some one-time items related to the acquisition of Reynolds
and the changes in US corporate tax code.
The company is
expected to generate 3.29 Pounds/share in 2021.
The figures are
in British Pound Sterling (GBP), since this is a British Company based in the
UK. There will be currency fluctuations for US investors in British shares,
driven by the changes in currency rates between the US dollar and the British
pound. Even if the dividend increases in British Pounds, it is possible that
your dividend income in US dollars decreases, if the British pound depreciates
in value.
There are fears
that there will be ban on the sale of menthol tobacco products in the US by the
FDA. Even if that happens however, it would take a long time to be implemented.
Menthol cigarettes account to almost a quarter of profits. There is also
increased pressure on e-cigarettes as well, which have been a growth
opportunity for tobacco companies like BTI.
The number of
smokers in the developed world is expected to keep declining. This effect is
usually offset by price increases which are larger than declines in the number
of smokers. BTI is investing in its next generation products, which could spur
growth in the future, while also striving to maintain its position in the
traditional tobacco products markets. I really like the fact that BTI is well
diversified internationally, with exposure to North America, Eastern Europe
Middle East and Africa, Europe, and Asia. This diversification spreads the
regulatory risk down a notch.
BTI acquired
Reynolds in 2017, and is working to integrate the operations, while also
realizing the synergies expected from the deal. Future growth can also be achieved
by acquisitions, which the company has had a strong history of successfully
integrating under its umbrella.
BTI owns
leading electronic cigarette brands such as Vype, Ten Motives, VUSE. In
addition, it owns the brands iFuse and Glo, which are heated tobacco products.
Major traditional tobacco brands include Kent, Dunhill, Lucky Strike, Rothmans
and Pall Mall. Strong brands tend to have pricing power, which is good for
profits in the long run. Given the global scale of operations, strong customer
loyalty to brander products, high barriers to entry, and strong generation of
excess cashflows and excess returns on investment, I believe that BTI has a
wide moat (though most other competitors such as Altria, PMI also spot a wide
moat as well)
Companies like
British American Tobacco can benefit from growth in emerging markets, where
smoking is more widespread and declines in smokers are much slower. The company
is well positioned in emerging economies. For example, it owns 30% of the
Indian tobacco company ITC.
The annual
dividend increased from 70 pence/share in 2008 to 2.08 pounds/share in 2020.
The forward annual dividend is 2.156 pounds/share.
The company
switched from paying dividends twice per year to a quarterly dividend schedule
by 2018. Prior to that it was paying dividends twice per year. The payments
differed in size however, although in total they grew each year since at least
1997.
Since this is a
UK based company, I analyzed the financial information in British Pounds. As a
US based investor, I will be buying the ADR’s traded on NYSE, quotes in US
dollars. The dividends in US dollars will fluctuate due to currency
fluctuations between the dollar and the pound. In the long run however, these
should not have that much effect, assuming that the underlying business model
is not fundamentally impaired.
The dividend
payout ratio has increased from 57% in 2008 to 75% in 2020. The forward payout
ratio is at 66%. While the payout ratio seems high, this is actually on the low
side for a tobacco company.
The number of
shares outstanding decreased between 2008 and 2016. The acquisition of Reynolds
in 2017 for cash and stock increased the number of shares outstanding. I
believe that while management will be prioritizing debt reduction over time,
there should be some room for further share buybacks in the future.
The shares of
British American Tobacco trade at a low valuation at just 8.54 times forward earnings
and have a high dividend yield of 7.65%. Based on the forward payout ratio, the
dividend looks sustainable. I view the stock as attractively valued today.
There are plenty of other tobacco companies to choose from these days,
including Altria. While the future is cloudier, given the risk of obsolescence
from other products, the valuations are compelling. If the dividend is at least
maintained, investors should be able to generate some decent returns over the
next decade.
