British American Tobacco (LSE: BATS) (NYSE: BTI.US) has struggled to deliver share price growth lately, but still offers a smoking income. Here are five ways this stock could make you rich.
1) By countering falling volumes
British American Tobacco has lost its flavour lately. Its share price is down 10% over the last 12 months, against a 7% rise in the FTSE 100. Over two years, it has returned zero growth. Falling volumes and macro troubles in Asia are largely to blame, although management has used pricing power to protect its profits. Its final results, just published, show it has pulled off the trick again. Group cigarette volumes fell 2.7% to £676 billion, yet revenue rose 4% at constant of exchange, thanks to positive pricing. Reported profit from operations was 3% higher at £5.5 billion.
2) Fine tuning its business
Hiking prices isn’t the only trick management has up its sleeve. It has also been working hard to make the business more efficient, cutting costs, standardising its systems and delivering productivity savings. BAT has raised its adjusted operating margins by 100 basis points to 38.1%. Its return on capital employed (ROCE) has also improved sharply, up from 23% in 2009 to 31% in 2013, as its investments deliver growth.
3) By heading upmarket
Volumes aren’t heading inexorably downwards. BAT has been working hard to promote its international brands and was rewarded with a 2.1% rise in volumes. Better still, it has been grabbing market share from its rivals, helped by its ‘Global Drive Brands’ Dunhill, Kent, Lucky Strike and Pall Mall, which increased both share and volume. Dunhill volumes rose 9.7%, Pall Mall grew 4.4%. Kent’s and Lucky Strike volumes both fell, however, the latter by 6.5%. But overall, key market share grew 20 basis points, while premium share was up 80 basis points. That helped ease the drop in cigarette volumes from subsidiaries.
4) Making e-cigarettes click
I’m still not convinced e-cigarettes will catch on, but British American Tobacco is giving the concept its best shot, launching Vype, its electronic cigarette, in the UK in 2013. That made it the first international tobacco business to enter this new market. The market is small, but growth prospects are said to be strong. This may help offset the many headwinds it now faces, including plain paper packaging, which BAT has threatened to fight in the UK courts.
5) Throwing money at shareholders
Growth prospects may have slowed, but don’t panic, there’s always the dividend. Management recommended a final dividend of 97.4p, taking the total 2013 dividend to 142.4p a share, a rise of 6%. Right now, the stock yields 4.4%, covered 1.5 times. Management also bought back 44 million shares at a cost of £1.5 billion in 2013 and has agreed another £1.5 billion buyback programme for 2014. Earnings per share growth is forecast to be a lowly 1% in 2014, but should rebound to 9% in 2015. By that time, the stock is forecast to yield 5%. BATs income prospects remain as tasty as ever.
