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British American Tobacco plc Could Be Worth £48.35

british american tobacco / imperial tobaccoSmoking might be going out of fashion, with cigarette volumes falling, but that hasn’t stopped top UK investor Neil Woodford from investing a sizable chunk of his clients’ cash in both British American Tobacco (LSE: BATS) (NYSE: BTI.US) and Imperial Tobacco.

Those folks have done well, too, as British American shares have been on the up since February, wiping out an earlier slump to break even over 12 months at 3,531p. Over five years, they’re up 110% compared to the FTSE 100’s 55%, and have been providing investors with dividend yields in excess of 4% per year.

Earnings growth has been slowing, from double-digit rises a few years ago to just 5% in 2013, and 2014 is forecast to show no growth at all.

Earnings reversal

But after that, analysts think that earnings per share (EPS) should start to rise again, with a 9% gain penciled in for 2015.

From there we have tentative growth all the way to 2018, which would take EPS forecasts up from 214p this year to 286p.

The share price valuation has tended to stick around the FTSE’s average P/E of 14, and assuming that same level by the time 2018’s results come around, we should expect to see the price heading for around 4,000p.

Not great

That’s a gain of around 13%, which on its own really isn’t a great return over five years — even a savings account would come close to that.

But that reckons without the effect of dividends, and the City’s prognostications suggest shareholders might have a very nice 835p in cash to add to the pot.

Better

That would take the total value of each British American Tobacco share today up to 4,835p in five years time for an overall gain of 37%.

With 65% of the stock’s five-year growth coming from the annual cash handout, it really does help show the value of sustainable dividends — and that reliability is what a lot of investors will be looking for, even if there are better potential gains to be had elsewhere.

And, of course, you’d do even better than that 37% if you reinvested your dividend cash each year in more British American Tobacco shares.

Want some?

If you like the idea, you’re not alone — 12 out of 23 analysts are recommending we Buy the shares, with only two urging us to Sell and the rest adopting a Hold stance.

If you're searching for more shares that should serve you well in the coming decades, "The Fool's Five Shares To Retire On" report is a must-have. It really could help you form the foundation of a long-term portfolio.

It's completely free, and you might like the ideas -- so just click here to get your copy today!

Alan does not own any shares in British American Tobacco or Imperial Tobacco.