Eyes Down For British American Tobacco plc’s Results

Is falling tobacco consumption hurting British American Tobacco plc (LON: BATS)?

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british american tobacco / imperial tobaccoDespite a nice rise over the past couple of weeks, British American Tobacco (LSE: BATS) (NYSE: BTI.US) shares are still down about 8% over the past 12 months, to 3,125p.

Slowing consumption

The reason seems clear — as the world grows increasingly health-conscious, tobacco consumption is falling. But British American is still managing to grow its earnings, by focusing more and more on its higher-margin premium products.

And although double-digit growth in earnings per share (EPS) is increasingly looking like a thing of the past, EPS is predicted to have grown by 4% for the year ended December 2013 — with the results scheduled for Friday 28 February.

First-half profits up

At the halfway stage to June, revenue was up 4% at constant rates of exchange, as British American was successfully pushing sales of its premium brands. And adjusted EPS was up 8%. But the number of actual cigarettes sold fell 3.4% to 332 billion, with total tobacco volumes down 3.2%.

Three months later, we heard that year-to-date revenue was up 3.5% at constant exchange, with sales of the firm’s premium brands up 1.9% by volume. But overall cigarette volumes were still down, having dropped 3.2% to 501 billion.

While acknowledging “lower industry volume“, chief executive Nicandro Durante said “We remain on track for a year of solid earnings growth“.

Growth is slowing

So things are looking fine, in the short term at least, with analysts forecasting more modest EPS growth this year of 2% followed by a more impressive 9% in 2015. But the shares’ P/E valuation isn’t looking like a great bargain to me right now — indications suggest around 14.5 for the year just gone, dropping only as far as 13 by the end of next year.

But dividends are continuing to look good, with British American Tobacco still a popular investment for income-seekers. The annual payout has been rising steadily, and after a few years of yields averaging around 4.5%, payments are predicted to continue on up and to top 5% by 2015 on today’s price.

Handling the decline?

British American Tobacco has been doing well in extracting maximum profits from the weed. But it’s an industry that is showing all the signs of having finally started on a long slow decline, and next week I reckon investors should be looking for a credible strategy to keep profits going over the longer term, not just for the next couple of years.

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.

> Alan does not own any shares in British American Tobacco.

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