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British American Tobacco: Mixed Future Ahead

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Bears of Wall Street


  • Since the beginning of the year, British American Tobacco shares have depreciated in value by more than 12%.
  • Recent earnings report shows that British American Tobacco's organic profit growth is in the single digits, while its volume sales continue to decline.
  • The company’s dividend yield has been constantly declining in the last decade and its stock has a downside of 25% to 30% from the current market price.

Two weeks ago, British American Tobacco (NYSE:NYSE:BTI) reported its worldwide earnings results for the full fiscal year that ended on December 31, which were higher than the markets’ expectations thanks to the company’s purchase of American tobacco manufacturer R.J. Reynolds. At first, investors might have felt excited about those results, as the company saw its profit increase by 39% Y/Y. However, if we dig deeper, we will see that most of the profit came from the acquisition of Reynolds, as British American Tobacco's organic profits were up only 3.7% Y/Y, primarily thanks to the weak sterling.

Also, organic volume sales were down 2.6% on an annual basis and the tobacco industry continues to feel the pressure from the regulators that plan to enact stricter rules regarding the usage of the tobacco-based products, which are already on a decline.

In addition, if we look at other market participants from the tobacco industry, we will see that their earnings results weren’t as good as the market expected them to be. For example, Altria (NYSE:MO), which is headquartered in Virginia, announced earlier last month that its Q4 revenues were down on an annual basis, which resulted in the company’s decision to set a full-year profit guidance below market expectations.

Slow growth in the tobacco industry has been a common thing in the last few years, as the big players are starting to use their free resources to purchase new assets in order to increase the value of their overall portfolio. While the diversification might be considered a good thing for tobacco manufacturers, we are still about to find out if those acquisitions will bring great benefits for the shareholders in the long term.

Image: British American Tobacco

When we tried to find out the intrinsic value of British American Tobacco, we decided to use

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Bears of Wall Street is a community of asset managers and traders who take a pragmatic approach to valuing companies. Bears of Wall Street provide unique research with a bearish sentiment on overvalued or weak companies with declining businesses and poor growth perspectives - companies whose likely depreciation can be capitalized on. They lead the investing group Best Short Ideas where they provide: trading alerts, weekly short ideas, live portfolio tracking, cash flow models, and chat for dialogue with the service leaders and community. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (13)

Clauser1960 profile picture
Declining smoker rates are a fact. Tobacco stocks are good to hold and drip, but they are no longer a buy. I hold and drip them because: they are a defensive component, my yield on cost is fantastic, I don t want to pay taxes on very high profits.
Austinbroker profile picture

In fact you are buying the stock by DRIPing. Why not collect the dividends as cash and invest in something else then? You are still paying taxes on the dividends either way.

BTW I just added my first 100 shares of BTI recently. Quarterly dividend payments have just begun and I don't mind 65% payout so they can use the rest of earning to grow the business faster plus I like the international exposure.
chrave1956 profile picture
I will take this group up on its offer to ask any question .... over your history , is your group’s successful bets better or worse than flipping a coin ?
Librarian Capital profile picture
The comment "organic profit growth is in the single digits" is misguided. While true on an EBIT level, it ignores how BATS has seen organic growth of c. 10% each year in EPS for the last 3 years, and how EBIT margin is currently lower due to investments in next-generation products (surely one of the biggest debates on the stock).

Also, can it really be that "organic profits were up only 3.7% Y/Y, primarily thanks to the weak sterling", when organic profits were by definition excluding the impact of currency?
If you could go back in time 30 years, this would have been a parallel analysis to Altria. Major pessimism about declining smoker rates, government regulation, reduced volumes... Yet, selling an addictive product with huge markups, low capital costs and strong pricing power would have made any investor a very lucrative return.

BTI has a long runway to raise prices, generate dividends and grow organically through vaping and reduced risk products.

I'm buying at these levels and planning to hold for a long time. Will back up the truck if it hits $44.
arthur_bishop1972 profile picture
I'll be amazed if the pps falls to $44.xx, but in a way I already am as there just hasn't been a decent bid for this stock in quite a while. They have some solid products, and the avenues to sell them around the world, but there's just no excitement for this stock. It doesn't help that the keep the p/r around 65% (MO's is 80%) and have to deal with currency fluctuations too.

I sold my BTI (both from RAI acquisition and me buying more @ $60 about a year ago) in various tranches above $64, $67, and $68 and bot more MO and VGR fwiw.
ryanmartin8 profile picture
Keep up the negativity around BTI, I will keep buying more.
I own it and have no plans to sell it.
Better buy more!
Otherwise you miss a great chance.
BTI will be just fine!
I'm buying some more
A classic short hit job!
Good humour value.
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