Something I’ve noticed over the last few years has been the disparity between the performance of companies that are focused on Europe and those that aren’t.
Indeed, companies for which Europe is a key market have been struggling to post any kind of profit growth. However, companies for whom emerging markets in particular are a sizeable chunk of revenue seem to be growing profits relatively easily.
For companies such as British American Tobacco (LSE: BATS) (NYSE: BTI.US), which operate across the globe, Europe has been a substantial drag on performance.
So, I was very encouraged to see that the eurozone’s much-anticipated recovery has made further progress in August, with the Eurozone Markit Purchasing Managers’ Index (combining both manufacturing and service sectors) rising to 51.7 in a preliminary reading for August. This is up from 50.5 in July and is at its highest level in two years.
With around 23% of total BAT’s revenue being derived from Western Europe alone, the news is very welcome for the tobacco group.
However, what makes me even more bullish on the company is its mixture of a great yield, reasonable valuation and long-term growth prospects.
Firstly, its yield is currently 4.1% — far higher than anything you would receive from a savings account and ahead of current inflation.
Furthermore, despite British American being a mature company in a mature market, its payout ratio of 65% is hardly overly generous. So, I believe there is scope for dividends to not only increase as earnings increase, but to become a bigger proportion of earnings in future.
Secondly, the current price to earnings (P/E) ratio of 15.8 is not excessive when compared to the FTSE 100 P/E of 14.6. British American Tobacco has, as mentioned, an above-average yield as well as above-average growth prospects. Consensus forecasts for earnings per share show an annualised growth rate of 7% over the next two years.
Thirdly, world demographics are in the company’s favour. Certainly, a smaller proportion of people are choosing to smoke these days. However, with the world population set to grow rapidly in the coming years, there are expected to be more smokers in 2050 than there are today, giving British American Tobacco a vast swathe of potential customers in the future.
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> Peter does not own shares in British American Tobacco.