I’ve long been an admirer of British American Tobacco (LSE:BATS) shares. Some have referred to them as a ‘sin stock’, but I see nothing sinful about transitioning to a more sustainable business model while maintaining profitability.
Its trading update is due tomorrow. There are already murmurings that the company is likely to raise its full-year 2022 profit guidance beyond what city analysts are expecting. I’ll explain why December may signal the time for me to add the shares to my portfolio.
A defensive success
The tricky economic conditions of 2022 have put a lid on my discretionary spending. However in my home, demand for food, household products, and tobacco (for me) hasn’t let up.
The leading tobacco stocks are notable for the consistent performance of their underlying businesses. This is regardless of changing economic conditions. Being a smoker I can attest to this. I think that’s why the British American Tobacco share price has risen markedly this year, despite the volatile market.
I’ve seen how the FTSE 100-listed company has been able to use its pricing power to offset the impact of declining tobacco volumes. Additionally, I’m confident the aggressive expansion of its non-cigarette business will continue to prop up its dominant market position. People are smoking less and its e-cigarette business is now firmly in the black. Furthermore, I believe its healthy level of share repurchases this year suggest long-term confidence from the board. These factors can contribute to a growing share price as well as consistent income for an investor like me.
A dirt-cheap value stock
British American Tobacco’s growth consensus of 10.4% is the highest in 20 years. Its price to earnings valuation is at the lowest in 20 years. Simply put, this looks like incredible value to me.
The current price of £34 at which the shares are changing hands looks a snip once I take into account the consensus price target is £45.
I think it’s highly likely the company could raise its FY22 guidance and be even more profitable than analysts expect. Its exit from the Russian market has been slower than planned and I expect this to have unwittingly boosted the company’s underlying profits.
Furthermore, I view the company as one of the best dividend payers in the FTSE 100. British American Tobacco shares consistently offer a high yield. Needless to say it’s offering one of the highest yields (6%) currently.
However, there’s a sizeable elephant in the room tempering my optimism. The company is highly leveraged. In a low-interest-rate environment this is fine. But if rates continue edging up, cash flow issues could dash my vision of growing profitability for the business.
A cautious bull
I’m expecting a bullish update from British American Tobacco this Thursday. I foresee high dividends as well as buybacks now and into the future. Meanwhile, its diversification into non-combustible products (and its growing success there) shows the company is well positioned for the long term. Even with high inflation, the shares have greatly outperformed the wider market.
My only concern is continued hawkish monetary policy from the central bank. I’m wary that aggressive rate rises could make its debt pile an insurmountable one for the firm. It’s something I still need to weigh up regarding whether I buy this month or not.
