As an old saying goes, money won is twice as sweet as money earned — either way, you could make some serious money with British American Tobacco (LSE: BATS)!
If you are already invested in its shares for the long term, you’d do well to raise your stake in this tobacco maker. At 3,450p, where its stock currently trades, BATS is a pretty good deal based on multiples and fundamentals.
I’d probably be more cautions with BT (LSE: BT-A), which carries more risk, yet I embrace a Woodford-like approach towards miners, so I am reluctant to pour more cash into Rio Tinto (LSE: RIO).
BATS: From Heaven To Hell In A Few Days
Its shares are flat for the year and were badly hurt last month when investors clearly overreacted to bad economic news from China. Volatility has dropped, but there is still no safe place to hide in the equity markets.
BATS shares rose to 3,830p soon after its half-year results — which were good indeed — were released on 29 July. Net debt (up 30% to £13bn) is rising because the group invested $4.7bn of cash in Reynolds to maintain a 42% equity position in the combined entity that emerged following the $25bn acquisition of Lorillard by Reynolds.
Net leverage is under control at about 2.5x, yet equity investors need to see much lower levels of debt to hold exposure in equities when volatility springs back. That’s one of the reasons why BATS stock dropped 12% between 6 August and 24 August, underperforming its rival Imperial Tobacco by about five percentage points — although that also goes down to the relative weakness in Imperial’s valuation since June.
Add BATS is my advice here.
How Much Risk Do BT & Rio Carry?
Telecom and miners are not particularly attractive at present time, in my view.
Of course, BT is more appealing that its rivals, but at 440p a share — the stock is up 8% this year — it needs a combination of lower pension deficits and higher growth rates and dividends to receive a valuation premium from investors.
Based on its earnings profile, its stock trades in line with the FTSE 100’s long-term average price-to-earnings multiple of 15 times, and I’d prefer to invest in BT rather than in the main index, but I would not be prepared to splash out on its stock if my name was already on the shareholder register.
Finally, Rio Tinto, whose stock is not far off its multi-year low of 2,107p.
Assuming you bought its shares at some point over the last 60 months, you are likely recording a paper loss of at least 20%. My advice is to be patient, even though a dividend cut may be just around the corner.
According to several analysts, a 30% to 50% drop in iron-ore prices over the next couple of years is likely, and although I do not necessarily agree with such a dreadful scenario, I am convinced there’s much better value elsewhere for a much lower level of risk.
