As a long-term investor, I am always on the lookout for quality shares I can tuck into my portfolio and hold for a decade. I am eyeing one UK share to buy now and add to my existing holding. And I can imagine holding it for 10 years or more.
Long-term outlook
The company in question is British American Tobacco (LSE: BATS). The London-based tobacco giant owns brands including Pall Mall and Rothmans. But most people know that cigarette buying is in long-term decline. So, why do I see British American as a company to own for a decade?
There are two reasons. The main one is the durable economics of the tobacco business. As it has a portfolio of premium brands, it has what is known as pricing power. That means that it can offset declining volumes by putting up prices. In fact, last year it actually saw cigarette revenues rising by 4%. Although volumes continue to shrink in many markets, some are still growing – and the company has that pricing power. This means it can probably milk the cash cow of cigarettes for a considerable period of time to come.
New revenue streams
Even though cigarette use is in decline, it is a long-term decline. I reckon the industry could continue for decades. Meanwhile, it may continue to be hugely profitable. British American Tobacco has raised its dividend each year for over two decades and currently yields 6.4%. That does not mean that it will keep raising its dividend or even paying one at all. But for now, I think even a declining cigarette market is set to continue being very profitable for the company.
The second reason I see for buying and holding this stock is that it has charted a path to reduce its reliance on cigarettes. The company has focused heavily in the past few years on developing next-generation products, such as so-called modern oral and vaping ranges. So far this has been costly, as the company has invested in building new brands and distribution channels. But hopefully over time, the initial costs will fall and this business can be profitable. The company forecasts that its next-gen portfolio will become profitable in 2025.
British American Tobacco has lots of experience in building tobacco brands, managing supply chains and turning sales into profits. I think the next-gen portfolio, which saw sales grow 42% last year to hit £2bn, could be a strong source of profits for the company a decade from now.
A UK share to buy now
British American is a highly profitable company and those profits support a generous dividend. Demand for its key product is declining. But the company is managing that decline carefully and cigarettes could remain a significant source of profits for decades to come. Meanwhile, it is fast developing a business drawing on its proven strengths that has the potential to provide sizeable new revenue and profit streams.
I hold it in my portfolio and would consider buying more now to hold for the coming decade.
