Is British American Tobacco plc Set For Electrifying Earnings Growth In 2014?

Today I am looking at cigarette giant British American Tobacco’s (LSE: BATS) (NYSE: BTI.US) earnings prospects in 2014.

Earnings growth set to slow

The breakneck earnings growth of British American Tobacco is expected to slow dramatically in the future. The effect of a rising population, particularly in developing markets where personal income levels are increasing, is helping to push aggregate cigarette demand higher. But overall off-take is slowing markedly from previous decades as consumers wise-up to the health risks and macroeconomic pressures strike spending power.

On top of this, the prospect of accelerating regulatory measures to discourage smokers — from the introduction of plain cartons and larger health warnings across the globe, through to bans on smaller packs in Europe — threatens to exacerbate demand woes in coming years.

Despite fears over an overall contraction in global tobacco demand, however, British American Tobacco’s bag of industry-leading brands continues to drag customers away from its competitors, a critical quality in an increasingly-constricted industry. Indeed, the firm announced in October’s interims that market share across its Global Drive Brands rose strongly in its Top 40 geographies during January-September.

Volumes amongst these key labels, comprising the likes of Dunhill, Kent and Lucky Strike, rose 1.9% in the first nine months of the year. Although British American Tobacco continues to witness heavy sales pressure — total tobacco volumes slipped 3% during the period — the formidable pricing power of these brands continues to drive revenues skywards. And the business is planning to develop its brand power by developing a suite of ‘premium’ cigarettes, a rapidly-growing market segment.

British American Tobacco has punched stunning annual earnings growth for many years now, and boasts a compound annual growth rate of 12.6% over the past five years alone. But City analysts expect earnings expansion to slow in the medium term, with an expected 5% rise this year — to 218.2p per share, anticipated to increase 6% in 2014 to 231.4p.

Still, these projections leave British American Tobacco dealing on a P/E rating of 13.7 for next year, well below an average forward reading of 16.4 for the entire FTSE 100. In my opinion this is great value for a firm with a robust record of earnings expansion, an enviable stable of turnover-driving labels, and a strong position in the set-to-gallop e-cigs sector, a potentially-explosive revenues driver.

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Like most tobacco plays, British American Tobacco is an established dividend favourite owing to consistent increases in the annual payout. And forecasters expect the firm to build the dividend again this year and next, figures which would create stonking yields of 4.6% and 4.8% if realised.

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> Royston does not own shares in British American Tobacco.