Is There Still Time To Buy British American Tobacco plc?

Can British American Tobacco plc (LON: BATS) move higher, or are the company’s shares overvalued?

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Right now I’m looking at some of the most popular companies in the FTSE 100 and wider market to try and establish if there is still time for investors to buy in.

Today I’m looking at British American Tobacco (LSE: BATS) (NYSE: BTI.US) to ascertain if its share price has the potential to push higher.

Current market sentiment

The best place to start assessing whether or not British American’s share price has the potential to push higher, is to take a look at the market’s current opinion towards the company.british american tobacco / imperial tobacco

Luckily, despite shaky markets around the world, investors continue to view British American in a positive light. Indeed, at present it would appear that investors are seeking solace in British American shares, due to the company’s defensive nature, predictable earnings growth and impressive dividend yield.

As a result, the company’s shares have jumped 12% during the past three months, while the wider FTSE 100 has declined by 3%.  

Upcoming catalysts

As a defensive company by nature, there are very few catalysts that will have a major effect on British American’s outlook.

That being said, being tobacco company, British American’s sales are falling on an almost daily basis as the number of smokers around the world continues to decline. 

Nevertheless, British American remains focused on increasing sales of the company’s ‘global drive’ cigarette brands. Indeed, the company’s global drive brands reported a 2% rise in sales volumes during 2013 and further growth is expected this year.

With this success behind it, British American is planning to add another brand to its global drive initiative during 2014, which should help to boost volumes further.  What’s more, the company continues to increase the price of its cigarettes to offset falling sales, this is having the unintended consequence of widening profit margins.  


Unfortunately, as one of the market’s most defensive company’s, investors are prepared to pay a premium for British American’s shares. In particular, British American currently trades at a historic P/E of 15.6, a valuation which could be too rich for some investors.

However, if we compare British American’s valuation to that of Philip Morris International, British American’s larger international peer, the company looks appropriately valued. Specifically, at present, Philip Morris International currently trades at a historic P/E of 15.8.

Further, despite British American’s high valuation the company still offers an impressive dividend yield of 4.2% and City analysts expect this yield to rise to 4.6% during the next two years.  

Foolish summary

So overall, based on British American’s defensive nature and appropriate valuation, I feel that there is still time to buy the company’s shares. 

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.

Rupert does not own any share mentioned within this article. 

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