Harvey Jones sizes up British American Tobacco (LSE: BATS).
It's time to go shopping for shares again, but where to start? There are loads of great stocks to choose from, and I've got my wallet out. So here's the question I'm asking right now. Should I buy British American Tobacco (LSE: BATS) (NYSE: BTI.US)?
Tobacco companies' products might kill you, but their stocks can be a lifesaver in a recession. Smokers still need their fix in hard times, and defensive investors can get high on the fumes. British American Tobacco hasn't made anybody rich this year, its share price has risen a modest 3% since January to £31.76, but once you throw in its 4% yield, it has easily beaten cash. And that's what defensive stocks are supposed to do. I don't smoke, but could the world's second biggest tobacco company light up my portfolio?
Death and taxes
Defensive doesn't mean failsafe. British American Tobacco is actually down 11% since early August, amid concerns that cigarettes are, ahem, a dying product. High taxes and health awareness have hit sales in the developed world, and I would expect that trend to continue, and eventually spread to emerging smokers. Chief executive Nicandro Durante is already preparing for this. He founded BAT's special Nicoventures unit, which is developing a range of non-inflammable products, such as smokeless cigarettes and nicotine inhalers, chewing tobacco and snuff. Durante may be wise to the threat, but I question whether these baccy alternatives will give smokers the kick they need, except maybe to quit.
There are other threats. Excise tax hikes may not stop people from smoking, but they do drive smokers towards cheaper brands or the black market, hitting BAT's volumes. Governments are likely to keep up the squeeze on tobacco companies, pushing for stomach-churning pictures on the packaging. With Western governments desperate to raise tax revenues, the evil weed will remain an easy target. Plus there is the growing danger of class action litigation from smokers who claim tobacco companies have underplayed the health risks.
Yet the world is still full of smokers. Sales of BAT's four big global brands, Dunhill, Kent, Lucky Strike and Pall Mall, grew 3% in the nine months to September. Group revenue grew 4%, as the company got its pricing strategy right. But overall, volumes fell 1.8%, in line with a general industry decline. BAT is the most geographically diversified major tobacco company, and although China remains closed to Western tobacco, it is seeking new opportunities in Asia, Africa, Eastern Europe and the Middle East. But what investors really crave in a tobacco stock is the dividend, and BAT's 4% yield is healthier than any of its products. Despite recent falls, I wouldn't call BAT cheap, trading at 15.4 times earnings. But it has resumed its share buyback programme, which should support the share price. BAT looks a buy to me.
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> Harvey doesn't own any shares mentioned in this article.