There are things to love and loathe about most companies. Today, I’m going to tell you about three things to loathe about British American Tobacco (LSE: BATS) (NYSE: BTI.US).
I’ll also be asking whether these negative factors make the FTSE 100 tobacco giant a poor investment today.
Products
Let’s do the obvious loathe first. BAT’s products kill people; and the company and its shareholders profit from it. Most smokers get hooked as kids — a time in life’s journey not particularly associated with making informed personal choices about the long-term future.
The educated classes of the developed world are turning away from tobacco. BAT and other fags firms have moved aggressively into emerging markets to drive their growth. Even allowing for increasing population, the spread of education will surely take its toll on tobacco sales sooner or later.
Competition
Counterfeit products that can be almost impossible to tell from the real thing harm BAT’s sales. As do “lookalikes”: for example, BAT’s State Express 555 brand may be mimicked but the numbers changed to “999”.
BAT’s last annual report is riddled with references to lower volumes due to increases in illicit trade. Indeed, the company puts illicit trade first within the “Key Group risk factors” section of its annual report saying this “continues to represent a significant and growing threat to the legitimate tobacco industry”.
Relative value
At a current share price of 3,546p, BAT is trading at 15.9 times this year’s forecast earnings with a prospective dividend yield of 4.2%. The earnings rating is on a par with the FTSE 100 average, while the income is a full 1% higher.
But BAT looks less attractive on those value measures when compared with Footsie peer Imperial Tobacco. The latter’s shares are currently trading at 2,223p, offering a multiple of just 10.6 times forecast earnings and a forward yield of 5.4%.
A poor investment?
I don’t think the three reasons I’ve given to loathe BAT necessarily make the company a poor investment.
First, I believe it will be many decades before the spread of education through the undeveloped world will take its toll on tobacco sales.
Second, it’s been claimed that tobacco companies are overstating the threat of illicit trade as a lever to lobby governments for lower taxes.
And third, while BAT looks relatively poor value against Imperial Tobacco on price-to-earnings and yield, it has a number of other things in its favour, including superior geographical diversity. Remember, too, that despite its higher rating than Imperial, BAT still looks reasonable value against the wider market, particularly on income.
One savvy investor who has made BAT his largest tobacco-company bet is City legend Neil Woodford. Woodford has massively outperformed the market for a quarter of a century, so his big stock picks are always worth close consideration.
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> G A Chester does not own any shares mentioned in this article.
