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1.9 Stunning Reasons Which May Make British American Tobacco plc A Buy

Today I am detailing why I believe British American Tobacco’s (LSE: BATS) (NYSE: BTI.US) stunning brand collection makes it a potential earnings winner.

Heavyweight brands undergird sterling growth prospects

British American Tobacco’s relentless ability to punch steady earnings expansion makes it a favourite among growth investors. And I believe that the company’s four self-styled ‘Global Drive Brands’ — comprised of Dunhill, Lucky Strike, Kent and Pall Mallshould continue to push group earnings higher, these labels having seen volumes rise 1.9% year-on-year during January-September.

Indeed, continued strength from British American Tobacco’s marquee brands helped the company increase market share in its Top 40 markets, as well as enjoy chunky revenue growth. At constant currencies, turnover rose 3.5% during the period, the business said, although this translated to actual growth of 0.7% taking into account weakness in a number of key currencies.

While British American Tobacco’s four premium labels saw volumes rise during the first nine-months, the rest of the company’s labels did not enjoy the same level of success, however, with total volumes from subsidiaries dropping 3.2% to 501bn sticks. The firm blamed this on wider industry difficulties, excise-related trade inventory movements in the critical market of Brazil, as well as the leap year comparator.

Still, as the January-September results showed, British American Tobacco can rely on its Global Drive Brands to keep income ticking higher in spite of weakness elsewhere. Indeed, the supreme pricing power of these labels enables the firm to maintain steady earnings growth even in the event of broader macroeconomic pressure on consumer wallets.

As well, the company’s premium brands are also helping the company to make strong progress in key emerging markets. Although cross-label performance was mixed during January-September, Dunhill volumes rose 9.6% during the nine months, pushed by strong demand from South Korea, Indonesia and the Gulf states. Indeed, strength from Dunhill helped to drive group demand from the Asia Pacific 5.7% higher to 149bn cigarette sticks.

On top of its strong earnings prospects, British American Tobacco is adored by investors seeking access to exceptional dividend prospects, the company’s progressive dividend policy having delivered chunky annual payout increases over the past several years. And City analysts expect further dividend rises in 2013 and 2014, with projections for these years providing yields of 4.1% and 4.4% respectively, far outstripping the FTSE 100’s forward average of 3.1%.

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> Royston does not own shares in British American Tobacco.