Head To Head: British American Tobacco plc vs Unilever plc

A comparison of consumer goods companies British American Tobacco plc (LON:BATS) and Unilever plc (LON:ULVR).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The investing merits of British American Tobacco (LSE: BATS) (NYSE: BTI.US) have often been outlined. But one thing I think is frequently over-looked is that BAT is really a fast-moving consumer goods company.

So if you are examining its merits, why not compare it with, not just other tobacco companies, but other FMCG companies — for example, Unilever (LSE: ULVR) (NYSE: UL.US). So this article will compare and contrast the investing merits of BAT and Unilever.

Before I proceed any further, I should briefly mention the health effects of tobacco. My view is that the question of whether you should invest in a tobacco company is similar to the question of whether you should smoke — it’s a question of freedom of choice. There is no need to invest in tobacco if you have qualms about it.

One company has twice the market cap of the other: can you guess which?

BAT is a company that is steadily growing, with much of its growth from emerging markets. Unilever is also forecast to grow steadily, and again most of its growth will be from emerging markets, but Unilever’s P/E ratio is higher.

So these companies are more similar than you think. But I bet you didn’t know that BAT has a third of the number of employees that Unilever has. And that BAT has twice the market capitalisation of Unilever. This underlines the high profit margins of BAT, its pricing power, and the strength of its brands, adding up to a high economic moat.

Which company would I invest in?

Tobacco is quite a niche industry, with high barriers to entry, whereas many of Unilever’s markets have low barriers to entry — many companies make shower gels, shampoos and washing liquid. That’s why, although Unilever has a research and marketing machine few can match, it is not as profitable as BAT.

On the other hand, BAT is likely, eventually, to be more highly taxed and regulated globally. So, over the very long term, its growth is likely to slow. This may explain why it is on a lower rating than Unilever.

So which company would I buy? Examine the long-term chart for both BAT and Unilever and we see that the share prices of both companies have practically doubled recently. So both companies look rather pricey to me at the moment, and, although BAT and Unilever are strong companies which are likely to grow into the future, I can find cheaper shares in the stock market at the moment.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Prabhat owns none of the shares mentioned in this article. The Motley Fool has recommended shares in Unilever.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »