MENU

British American Tobacco plc Could Be Worth 4,070p

British American Tobacco (LSE: BATS) (NYSE: BTI.US) is a company that, in spite of a decline in sales volumes, continues to deliver mid to high single-digit earnings per share (EPS) growth.

Certainly, the last couple of years have not been the easiest for the tobacco sector in general, with further regulations (such as the Australian plain packaging law and a ban on advertising in Russia) coming into effect. The impact of such regulations, it seems, has been a decline in the volume of cigarettes sold across the industry.

However, British American Tobacco has been able to offset top-line troubles with increased efficiencies and cost savings. In order to achieve this, it has invested heavily in property, plant and equipment via relatively high levels of capital expenditure. Last year the company spent £664 million, which is the highest level for over 5 years.

Such spending is highly beneficial to the bottom line because it helps to reduce costs and the overall effect is to increase margins and deliver higher EPS growth. With further cost savings and efficiencies scheduled, British American Tobacco should be able to offset at least a generous portion of the forecast future volume decline.

In addition, British American Tobacco remains a very reliable income play. It currently yields a very well-covered 4.4%, which is impressive when compared to the FTSE 100’s yield of 3.5%.

Indeed, were British American Tobacco to trade on the same yield as the wider index, it would mean shares reaching a price of 4070p. This would represent a gain of just under 25% and, over the medium to long term, such price appreciation could be achievable, partly as a result of strong and stable earnings growth.

As mentioned, British American Tobacco continues to be one of the most reliable growers of earnings among FTSE 100 peers, with the company able to put in place measures such as improved efficiencies when sales volume growth goes into decline.

Therefore, with the potential for a capital gain of just under 25% over the medium to long term, as well as the 20th highest yield in the FTSE 100, British American Tobacco seems to be ticking all the right boxes for investors.

However, despite offering clear attractions for income-seeking investors in particular, British American Tobacco is pipped to the title of The Motley Fool's Top Income Share Of 2013 by one of its peers.

It offers a higher yield and arguably more stability than British American Tobacco. If you don't own it then it could be something worth considering for inclusion in your portfolio.

To find out more, I'd recommend you take a look at an exclusive report that is free and without any obligation. It includes key information on the company that could help you to decide whether it's worth adding to your portfolio.

Click here to take a look.

> Peter does not own shares in British American Tobacco.