Smoking is becoming socially more unacceptable in the developed world, yet the FTSE 100‘s two listed tobacco giants continue to ship almost unimaginable volumes of the stuff every year.
In its last full year, British American Tobacco (LSE: BATS) (NYSE: BTI.US) sold 676 billion cigarettes, while rival Imperial Tobacco (LSE: IMT) shifted a total stick equivalent of 317 billion. That’s nearly one trillion cigarettes, from just those two companies!
What might seem worrying is that those volumes represented a 2.7% fall for British American and and a 7% fall for Imperial. And it’s part of a trend — a year previously, British American’s volumes were down 1.7% while Imperial’s dropped 2.7%. But what about the financials? Here’s a quick snapshot of the latest situation:
| British American Tobacco |
Imperial Tobacco | |
|---|---|---|
| EPS growth 2013 | +5% | +5% |
| P/E 2013 | 14.9 | 10.9 |
| Dividend Yield 2013 | 4.4% | 5.1% |
| Dividend Cover 2013 | 1.53x | 1.81x |
| EPS growth 2014* |
-2% | -3% |
| P/E 2014 | 16.5 | 12.3 |
| Dividend Yield 2014 | 4.3% | 5.2% |
| Dividend Cover 2014 | 1.45x | 1.59x |
| EPS growth 2015* | +8% | +4% |
| P/E 2015 | 15.3 | 11.8 |
| Dividend Yield 2015 | 4.6% | 5.6% |
| Dividend Cover 2015 | 1.45x | 1.51x |
* forecast
Profits looking good
Both are keeping their revenues and profits rising, despite the slowdown in volumes — in fact, the 5% EPS growth they both enjoyed in 2013 comes on the back of strongly rising profit trends. (There’s a small drop in earnings for this year forecast, but a 9% fall in the pound against the dollar over 12 months is going to hit any company reporting in sterling).
The trick, which the two companies are pulling off, is to move away from attempts to sell ever more low-margin products to the poorer developing world, and to focus their marketing efforts on the prestigious upmarket brands that many of today’s newly wealthy want to be seen with.
How long that will work against a growing health-led aversion to the filthy stuff is anybody’s guess — but I’d wager we’ll see another good decade or two of rising (or at least stable) profits from this pair.
Which is better?
Looking at the figures above, Imperial is offering better dividend yields with better cover, from shares on a lower P/E. So isn’t it the obvious choice?
Not necessarily, because it comes largely down to size and marketing clout. British American has a market cap of £65bn versus Imperial’s £24bn, and is producing nearly three times the pre-tax profit with signifiantly better margins — British American’s product mix is already better geared towards the higher-profitability end of the market.
And British American’s volumes are falling more slowly — 2.7% in 2013 against 7% for Imperial, and Imperial’s Growth Brand volumes actually fell by 2% that year. And more than half of Imperial’s sales in 2013 came from Western Europe, where social unacceptability is perhaps growing most strongly.
Biggest fish
In a market that’s becoming increasingly tough, my money (if I’d invest it in tobacco, which I actually wouldn’t) would be on the bigger and better diversified British American Tobacco.
