A preview of British American Tobacco plc's (LON:BATS) annual results.
The FTSE 100's tobacco giant, British American Tobacco (LSE: BATS) (NYSE: BTI.US), is due to announce its annual results on Thursday this coming week (28 February).
At the time of writing, BAT's shares are trading at 3,440p – up 12% from a year ago compared with a 6% rise in the Footsie.
How will BAT's business have performed in 2012 compared with last year? And will the results justify the strong performance of the shares? Here's your cut-out-and-check results table!
| | FY 2011 | Forecast
FY 2012 | Forecast
FY growth |
|---|
| Revenue | £15.40bn | £15.37bn | -0.2% |
| Operating margin | 35.8% | 36.9% | 110
basis points |
| Adjusted earnings per share (EPS) | 195.80p | 206.6p | +5.5% |
| Dividend per share | 126.5p | 134.3p | +6.2% |
Revenue
BAT has increased its revenue annually for as long as I can remember. However, analysts are forecasting a drop for 2012 – albeit of the most modest proportions. That forecast looks reasonable because at the nine-month stage the company told us revenue was down 1%.
However, shareholders can take comfort from the fact that exchange rate movements were responsible and that at constant rates organic revenue grew 3%.
As well as keeping an eye on the revenue numbers, you might also want to read the directorspeak closely for any improvement or deterioration in the trading outlook. In October, the company told us:
"The environment continues to be challenging, with industry volumes under pressure. In this environment the expansion of illicit trade remains a threat, driven by excise increases and pressure on consumers' disposable income."
Margins
Like most companies in these austere times, BAT has been working hard to cut costs. In 2011, cost-cutting helped the group increase its operating margin from 33.5% to 35.8% -- well ahead of its target of 50-100 basis points a year (one basis point = 0.01%).
If analyst forecasts are on the money, operating margin will again show an ahead-of-target improvement in 2012: the number to look out for is 36.9% (up 110 basis points).
Earnings and dividend
The difficult trading conditions of 2012 mean analysts are forecasting EPS growth of 5.5%. That's perfectly respectable, but well below the annual double-digit growth shareholders have become accustomed to.
Similarly, analysts expect to see a lower increase in the dividend than in past years – but at 134.3p a share, a still-healthy 6.2%. As BAT paid out an interim dividend of 42.2p (+11% on the previous year), look out for a final of around 92p (+4%).
BAT's dividend policy is to distribute 65% of earnings to shareholders, and the analyst forecasts for EPS and dividend per share are bang in line with that policy. The company has also been adding value for shareholders by buying back its own shares, completing a £1.25bn buyback programme in 2012.
It's worth mentioning the dividend and buyback policy in a little more detail -- and from the horse's mouth. Quizzed at a conference call this time last year, finance director Ben Stevens said:
“We're pretty comfortable with the 65% dividend policy. We're returning, essentially, all of our free cash to our shareholders with the dividend and the buyback together … [I think it's] sensible to stick with the 65% payout ratio … And to the extent we have spare cash, then we'll give it back to shareholders via a buyback.”
So, the level of the annual buyback programme gives us a pretty good guide to the health of BAT's free cash flow. Keep an eye on how 2013's buyback number will compare with last year's £1.25bn.
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> G A Chester does not own shares in British American Tobacco.
