This Research Means YOU Should Buy British American Tobacco Plc

Recent research highlights the vast potential of British American Tobacco plc (LON: BATS), meaning it’s a BUY in my view.

| 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.

As consumers, we’re conditioned into thinking certain things, in a certain way.

For instance, we all correctly think that a major factor in petrol prices being so high in the UK is government duty and taxation. Similarly, we all believe that cigarette prices have increased to the extortionate amount of around £8.50 per packet of 20 as a result of government duty increases, right?

Well, we may all believe that but research from the University of Bath shows, in actual fact, that between 2006 and 2009 about half of total price rises on cigarettes were due to tobacco companies simply putting up their prices. The other half was, of course, increases in duty but the tobacco companies should really be blamed by smokers as much as they currently blame the government.

Indeed, the research has been released at a time when tobacco companies are complaining about the increased cost of cigarettes and how it causes smuggling and the use of illegal cigarettes. Tobacco companies argue that duty increases are counter-productive, since people still smoke roughly the same number of cigarettes but, by using illegal rather than legal tobacco, the government is collecting no duty and running the risk of higher healthcare costs from unregulated products further down the line.

Clearly, the tobacco companies are either not as concerned about smuggling as they make out or are unaware that they themselves have been as much to blame as the government for higher prices.

Of course, price rises are (in reality) good for tobacco companies. Certainly, volumes of cigarettes smoked will at best remain flat if prices go up. However, this is more than offset by higher margins from higher prices.

Furthermore, there seems to be no limit on how high tobacco companies can go with price rises. When cigarettes were less than half their current cost, the same proportion of adults in the UK smoked (around 20-21%) as today. In addition, the cost of smoking in countries other than the UK remains relatively less versus median incomes (than in the UK), meaning there is more scope for price increases across the globe.

Clearly, there is potential for tobacco companies and my top pick in the sector is British American Tobacco (LSE: BATS) (NYSE: BTI.US). As someone who is frustrated by low savings rates, the current yield of 4% comes in very handy indeed.

Couple that with the potential to increase margins and deliver impressive and highly visible earnings growth and it is clear to see why British American Tobacco is a stock we should be buying.

Of course, you may be looking outside of the tobacco sector for an addition to your portfolio. If you are, The Motley Fool has come up with a shortlist of its best ideas called 5 Shares You Can Retire On.

It’s completely free to take a look at the shortlist and I’d recommend you do so. Click here to view those 5 shares.

> Peter does not own shares in British American Tobacco.

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.

More on Investing Articles

Man smiling and working on laptop
Investing Articles

These FTSE 100 shares could rise 15% to 36% in the next year!

Is the market underestimating these top FTSE 100 stocks? Royston Wild explains why analysts expect these two blue-chip shares to…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

Should I be watching the Greatland Gold (LSE: GGP) share price?

Recent rallies in valuable metal prices has boosted the Greatland Gold share price, but is there still an opportunity for…

Read more »

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

The abrdn share price is down 23% in the last year, should I buy?

Asset management firms have had a rough time lately, but with the abrdn share price down heavily, is now the…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

If I’d invested £5k in red hot BAE Systems shares 5 years ago here’s what I’d have today

BAE Systems shares have smashed the FTSE 100 for years and Harvey Jones is keen to buy more as they…

Read more »

Investing Articles

How I’d aim to earn £16,100 in passive income a year by investing £20k in a Stocks and Shares ISA

Harvey Jones is building a portfolio of high-yielding FTSE 100 dividend stocks that should give him a high and rising…

Read more »

Investing Articles

Down 8% in a month! The BP share price is screaming ‘buy, buy, buy’ at me right now 

When crude oil falls, the BP share price invariably follows. Harvey Jones is wondering whether this is the right point…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »