British American Tobacco (LSE: BATS) (NYSE: BTI.US) is a stock I’m considering adding to my portfolio because of all the uncertainty from the US about its monthly bond-purchase programme, the government shutdown and the state of its recovery from the credit crunch.
Indeed, it seems as though a reduction (or tapering) of the Federal Reserve’s monthly bond-buying programme is making the market nervous and concerned that significant share-price falls could be ahead.
Furthermore, recent comments by one of the Federal Reserve’s most senior officials seemed to indicate that the US economy was not yet in a strong enough position to reduce its dependence on the programme, despite recent data on unemployment, housing starts and GDP growth having been relatively encouraging.
Then there is the shutdown of US government services, which seems to be some way off being solved.
So, these three uncertainties make me seek out a stock with defensive qualities, a good yield and reliable growth prospects. British American Tobacco seems to tick all three boxes.
Firstly, it sells a product for which, whether the economy performs well or not, there will always be a demand.
An obvious point, perhaps, but relevant nonetheless because sales of tobacco are not usually significantly affected by a country’s economic plight, meaning earnings should be relatively stable and consistent, with the shares offering attractive defensive qualities.
Secondly, shares in British American Tobacco currently yield an impressive 4.3%, with dividends increasing in each of the last four years and being forecast to do the same in the next two.
In fact, dividends are well-covered at 1.5 times, meaning that the company continues to invest a sufficient amount of capital within the business while handsomely rewarding shareholders.
And thirdly, earnings estimates are relatively attractive, with the market forecasting earnings per share growth of 6% this year and 8% the year after.
Interestingly, British American Tobacco is, from my experience, one of the most reliable stocks when it comes to forecasting accuracy. This is simply because, supply chain issues apart, smokers tend to smoke the same brands and the same number of cigarettes each day, making budgeting easier for British American Tobacco than for many non-tobacco companies.
So, with all of the uncertainties in the US, British American Tobacco seems to be a good place to invest because of its defensive qualities, attractive yield and relatively predictable growth prospects.
Peter does not own shares in British American Tobacco.