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3 Great Reasons Why British American Tobacco plc Is Set To Take Off

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Today I am looking at why I believe British American Tobacco (LSE: BATS) (NYSE: BTI.US) is an excellent stock selection for savvy investors.

Believe in the brands

The tobacco giant boasts a tremendous stable of brand names, particularly the likes of Dunhill, Lucky Strike and Kent, which fall under its premier Global Drive Brands portfolio. So even in times of steady pressure on consumers’ wallets, the excellent pricing power that these labels provide allows revenues to keep ticking higher.

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Indeed, July’s half-yearly report showed that although group sales volumes fell 3.4% to 332bn sticks, turnover at constant rates actually rose 4% to £7.75bn. For its Global Drive Brands, volumes actually rose 2.3%, and spearheaded the company’s market share gains across its Top 40 geographies during the period.

Indeed, British American Tobacco’s superior brand strength is helping it to win the fight in exciting growth markets. Adjusted operating profit from Eastern Europe, the Middle East and Africa (EEMEA) rose 13% in January-June, for example, while its Asia-Pacific operations saw profits increase 9%.

Plain packaging fears up in smoke

The tobacco industry breathed a huge sigh of relief in May when the Queen’s Speech failed to include proposals for fresh legislation on cigarette packaging in the UK. The anti-smoking lobby has been intensively campaigning for plain cartons, with standardised markings and fonts for all brands and large, graphic health warnings.

A study conducted by medical journal BMJ Open in July in Australia — which introduced logo-less boxes late last year — seemed to indicate that less the attractive packaging can affect the taste of cigarettes and encourage smokers to quit. Thus the news that similar laws in Britain have been shelved, at least for the time being, has been welcomed by the likes of British American Tobacco.

A lucrative dividend payer

British American Tobacco is a well-loved pick owing to its enviable qualities as a reliable and generous dividend stock.
The firm has pumped the full-year payout over many years now, and last year’s payout was 36% higher than that of three years earlier, at 134.9p.

And broker Investec is anticipating full-year dividends of 145.3p and 159.7 in 2013 and 2014 respectively, figures that would realise annual growth of 7.7% and 9.9%. And these payments currently carry dividend yields of 4.5% and 4.9%, comfortably north of the prospective FTSE 100 average of 3.2%.

Smoke out other stunning stocks

So I reckon that British American Tobacco is an excellent bet for juicy shareholder returns. But if you are looking for a whole host of other FTSE 100 winners to bolster your investment returns, I strongly recommend you check out these recommendations from veteran fund manager Neil Woodford.

Woodford — in charge of UK Equities at Invesco Perpetual — has more than 30 years’ experience in the industry, and has marked out two other fantastic cigarette plays ready to generate monumental gains.

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> Royston does not own shares in British American Tobacco.

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