Smoking is good -- as long as you are smoking and I hold tobacco stocks. At the beginning of the month, I had reviewed Philip Morris International (PM), so I am now looking at a second stock in the tobacco industry in order to prepare for June’s dividend stock battle: PM Vs British American Tobacco (BTI), two giants holding cigars and cigarettes in their hands.
British American Tobacco is a holding company owning investments in several tobacco companies. Its major brands are Dunhill, Kent, Lucky Strike and Pall Mall. Its most popular brand, Dunhill, is sold in 120 countries. Overall, BTI sells its products in more than 180 countries. Note that sales in the US are made via Reynolds American (of which BTI owns 42%). 40% of its sales are coming from Europe.
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Company Ratios and Financial Info
Current Dividend Yield 4.20%
Five-year Dividend Growth 16.94%
One-year Dividend Growth 22.92%
Company Metrics :
Sales Growth: 4.75% (9.38% over five years)
Earnings Growth: 11.29%
P/E Ratio: 16.29
Payout Ratio: 78.81%
Return on Equity: 34.24%
Trend (technical analysis): Up
Upcoming opportunities and dangers:
The dangers within the tobacco industry have already been discussed in my PM analysis so I won’t repeat this topic. I will actually concentrate this segment on the recent moves made by BTI to keep its sales growth on the positive side.
As with PM, most of BTI’s growth potential lies in emerging markets and acquisitions. In June 2009, BTI bought 85% of Indonesia’s cigarette maker PT Bentoel (OTC:PBEIF) to reinforce its position in emerging markets.
More recently, BTI announced that it is about to acquire Productora Tabacalera de Columbia, or Protabaco, for GBP 452 million. This is a nice move as PM owns 51% of the market share in the Colombian market and BTI would grow to 33% with this acquisition. Here again, we can feel the war for gaining market share in emerging markets.
Since BTI is in 180 markets, it is highly subject to exchange rates fluctuations. For the past two years, its finance department did a great job with its hedging strategy and has profited from rate fluctuations. Its ability to manage exchange rate risks will be another factor to take into consideration in upcoming years. I would bet that it will succeed based on its experience with hedging strategies.
Growing company, growing dividends, growing sales … it’s hard to say what I don’t like about BTI. In a declining industry, it seems that BTI is a smart player and will find ways to keep growing for a while. As long as there are new markets to develop and companies to buy, BTI should be an interesting pick.