British American Tobacco plc Heading For 9% Growth

Earnings growth at British American Tobacco (LSE: BATS) (NYSE: BTI.US) has been sliding over the past five years. Back in 2009, the purveyor of the deadly weed enjoyed a 19% rise in earnings per share (EPS), but since then the annual rise has slowed as far as last year’s 5% — and there’s a small fall of 1% forecast for the year to December 2014.

british american tobacco / imperial tobaccoDividend growth has been slowing too, from the days of 14% growth in 2010 to 5.6% in 2013, although that is not expected to turn negative along with earnings. In fact, there’s still a dividend boost of 3.8% forecast for this year, to take the payout to 147p and provide a yield of 4.3% on a 3,464p share price.

2015 reversal

And expectations for 2015 are currently indicating a reversal of recent fortunes — we have a 9% EPS rise penciled in, together with a 7% hike in the dividend to take the yield up to 4.6%.

These predictions are way down on the analysts’ positions 12 months ago, mind — back then the consensus suggested EPS of 251p for 2014 with a dividend of 164p, and it’s a big drop to the latest 215p and 147p respectively.

Share price picking up

The share price has been falling for much of the past year too, and early in 2014 it had dropped around 20% — but we’ve since seen a recovery to take us back to a modest 5% slip over 12 months.

The problems for the tobacco business are well known — people are simply smoking less, and stick volumes at British American and rival Imperial Tobacco have been steadily falling year-on-year. But a switch in focus towards premium-priced brands has helped keep earnings rising, albeit at a slower pace.

Surprisingly popular

That, the healthy nature of the dividends (if not the companies’ products), coupled with the largely defensive nature of the business as an investment, has helped keep the punters bullish on British American shares.

In fact, out of a sample of 23 analysts, 13 rate the shares a Buy or a Strong Buy, with only two thinking we should sell the shares — the remaining eight are sticking with a Hold stance.

Not for the long term

Are the commentators right and should we buy British American Tobacco? Well, the City does tend to have a short-term outlook, and with a forward P/E of 16 for this year dropping to 14.5 for 2015, the shares are not overvalued in the short term.

But if you have a 10 or 20-year horizon, there are surely better places for your investment cash than a declining industry.

Finally, if you're looking for a hot share that's set for better growth than the tobacco business, look no further than the Motley Fool's BRAND-NEW "Top Growth Stock For 2014" report. It's a smaller-cap stock, but they're the ones with most room to grow -- and its earnings and dividends have been powering up nicely!

To find out more, just click here for your personal copy of the report while it's still available.

Alan does not own any shares in British American Tobacco.