British American Tobacco and Imperial Brands: which one would I buy?

British American Tobacco and Imperial Brands are in the same boat with tighter regulations affecting them. But they can be distinguished too.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s not a good day for nicotine stocks. Major FTSE 100 cigarette manufacturers like British American Tobacco (LSE: BATS) and Imperial Brands (LSE: IMB) are some of the biggest losers today. Their share prices have tumbled more than 6% so far, as the Biden administration mulls capping nicotine content in cigarettes. 

This can be yet another blow to the tobacco industry, which has been facing tighter regulations for a long time now. In that sense, both the tobacco stocks mentioned above are in the same boat.

But there are ways to distinguish between them.

Comparing performance

The most obvious is performance. Both companies did well as far as operating profits go last year. While British American Tobacco saw a 10.5% increase in 2020, Imperial Brands showed a huge 24% rise for the year ending September 30 2020. 

I think because there’s a difference of a quarter in reporting periods, Imperial Brands had some advantage over British American Tobacco, whose performance showed a fuller impact of coronavirus. 

Forays into new products

Another way I compared them was in terms of the performance of their new products, like vapes. With the increasing clampdown on nicotine, alternative products have seen rising popularity and tobacco companies are pivoting in that direction too. 

British American Tobacco is hopeful of growth in these new categories. So far it’s a small-but-revenue-generating segment. By 2025, it hopes that the segment will contribute £5bn to revenues. Imperial Brands, on the other hand, is struggling. It has pulled back investments from its next-generation products and appears to be restrategising its approach to them.

The all-important dividend

A third distinguishing feature for these FTSE 100 giants is their dividends. Both boast high yields. British American Tobacco has a dividend yield of 7.4% right now, and Imperial Brands is at a huge 12.4%. 

These are a saving grace at a time when both stocks’ prices are falling. In fact, they may even more than make up for the fall in share prices. According to my rough estimates, the share price fall on average in 2021 for Imperial Brands is less than the dividends paid. As a result, I end up with around an 8% net gain.

The same isn’t true for British American Tobacco, however. If I had bought its shares at the average price in 2020, chances are I would be sitting on a 5.6% decline on my investment, even after accounting for its hefty dividend. 

Weighing up

In sum, performance-wise there’s not much difference between the two tobacco companies. British American Tobacco, at least for now, appears to have a better handle on future growth through increased revenues from new categories. And Imperial Brands offers far better returns on capital. 

Which of the two I’d buy in this case,depends on my projections for my investing time horizon as much as it does on past performance. Today, however, I’m not tempted by the share price fall in either. 

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.

Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »