British American Tobacco (LSE: BATS) (NYSE: BTI.US) is one of those companies that has managed to keep its earnings per share (EPS) growing, but at a progressively slower rate.
And it actually looks set to slip to a fall of 4% for the year to December 2014, although with so much of its business overseas and denominated in currencies close to the US dollar, the strength of Sterling will be playing some part in that.
Slowing growth
British American was recording double-digit EPS growth until 2012, although it had slowed from 19% in 2009 to 11% by 2011, but then it slipped to just 5% growth that year, repeated in 2013.
But after this year’s predicted fall, analysts are forecasting 8% EPS growth for the year ending December 2015, and if that happens it will be the best in four years — but is it realistic?
The whole tobacco industry is feeling the squeeze as more and more people turn their backs on the noxious filth, and British American has been recording declining volumes for a number of years now.
Volumes declining
Results for 2013 revealed a 2.7% fall in the number of cigarettes sold by British American, although the total still came to a staggering 676 billion! That continued the downward trend, and at interim time this year we saw more of the same with a decline of 0.4% in volumes. But the trend could be slowing, and the firm’s refocus on high-margin products was bearing fruit.
Market share rose in the company’s key markets, and volume sales of what it calls its Global Drive brands climbed by 5.7%, leading chairman Richard Burrows to say “We remain confident of high single-digit earnings growth at constant rates of exchange, which we have said we will recognise with an increase in the dividend“. So even with a sterling-denominated bottom line, British American is still talking of underlying growth.
That promised increase in the dividend will have pleased shareholders, and at the current price of 3,658p they look set to enjoy an above-average yield of 4% this year and rising to 4.3% next.
Should be fine — for now
But going forward, that income is entirely dependent on steady earnings, and whether a higher-margin products strategy will be successful in the long term is debatable. Ultimately, surely, the growing trend to turn away from tobacco will win out — but in the medium term, I can see a few more years of earnings growth for BAT.
