Does British American Tobacco plc Provide Decent Bang For Your Buck?

Royston Wild looks at whether British American Tobacco plc (LON: BATS) is an attractive pick for value investors.

| 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.

In this article I am discussing whether British American Tobacco (LSE: BATS) (NYSE: BTI.US) offers attention-grabbing value for money.

Price to Earnings (P/E) Ratio

British American Tobacco has been a reliable provider of solid earnings growth over the past five years. But the impact of rising health concerns about smoking habits, constraints on consumer spending power, and a thriving black market has seen the rate of expansion decelerate sharply during this period — indeed, growth of 5% last year compares starkly with the 19% rise posted in 2009.

british american tobacco / imperial tobacco

And City analysts expect the business to record its first earnings decline for many moons in 2014, with a 1% fall currently pencilled in. But British American Tobacco is anticipated to strike back with a solid 9% rise in 2015.

Based on these forecasts, British American Tobacco currently changes hands on a P/E rating of 16.5 for 2014 and 15.2 for 2015. These readings are just above the 15 times prospective earnings that is generally regarded as reasonable value, although they still beat a forward average of 17.1 for the FTSE 100.

Price to Earnings to Growth (PEG) Ratio

On the back of this year’s anticipated earnings fall British American Tobacco fails to create a valid PEG rating. Next year’s predicted bounceback creates a reading of 1.7, although this falls outside the benchmark of 1 or below which generally represents blockbuster value relative to the firm’s growth prospects.

Market to Book Ratio

British American Tobacco’s book value, once total liabilities are deducted from total assets, comes out at around £6.9bn. This calculation creates a book value of £3.63 per share, creating a market to book ratio of 9.8. This readout appears incredibly inflated when tallied up against the yardstick of 1 which is widely regarded as bargain territory.

Dividend Yield

British American Tobacco’s sterling record of earnings growth has given it the firepower to consistently deliver market-beating dividend increases. And the City’s number crunchers expect the firm to keep payouts streaming higher, even in spite of this year’s slight earnings fall, with 2013’s 142.4p per share payment predicted to march to 146.8p in 2014 and to 157.2p in 2015.

These projections create appetising yields of 4.1% for 2014 and 4.4% for this year and next, comfortably outstripping a prospective average of 3.2% for the FTSE 100.

A Solid If Unspectacular Stock Selection

Looking at the metrics above, in my opinion British American Tobacco can hardly be considered a blistering share pick at current prices. I believe that the firm’s extensive exposure to developing markets — home to the vast majority of the world’s smokers — and aggressive moves into the e-cigarette market should underpin spectacular long-term earnings and dividend growth. But for those seeking excellent value in the meantime I reckon that more exciting stocks can be found elsewhere.

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.

Royston does not own shares in British American Tobacco.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

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

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

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

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »