3 Numbers That Don’t Lie About British American Tobacco plc

Is British American Tobacco plc (LON:BATS) a buy? Roland Head takes a closer look at three key numbers.

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british american tobacco / imperial tobaccoThe current investment case for British American Tobacco (LSE: BATS) (NYSE: BTI.US) is a little confusing. On the one hand, it has all the hallmarks of a great income stock.

On the other hand, I believe the tobacco industry is in decline, and BAT’s total sales have been falling for a number of years.

BAT’s shares aren’t cheap, either, and the firm has plenty of debt. So is BAT a buy, or a sell?

1. +23%

BAT shares have risen by 23% since 5 February, completing a remarkable rebound that has left the firm’s performance in-line with that of the FTSE 100 over the last year, up by around 2%.

However, February’s slide provided investors with a genuinely good opportunity to top up on BAT — at the shares’ lows, they offered a prospective yield of 5% and a 2014 forecast P/E of just 13.5, compared to today’s less compelling values of 4.1% and 16.6.

2. £250m

Last week, BAT confirmed it is involved in the complex takeover discussions between US firms Reynolds American, in which BAT has a 42% shareholding, and Lorillard.

In an article earlier this year, I suggested that BAT’s share of Reynolds’ profits could rise by around £250m per year, if the deal proceeds as it’s expected to, with Lorillard’s main brand, Newport, being absorbed into the Reynolds portfolio.

However, these extra profits won’t come cheap — BAT is expected to fund part of the Reynolds-Lorillard deal by purchasing new shares in Reynolds, which may require BAT to add to its £11.7bn debt pile.

3. -6.6%

In 2009, BAT reported group sales of 724bn cigarettes, or ‘stick equivalents’.

By the end of 2013, that total had fallen by 6.6% to 676bn. It’s a trend that’s expected to continue — BAT’s group sales fell by 1% during the first quarter of this year, despite volumes at its core brands rising by 6.3%.

The twist is that BAT’s increasing profitability and large share buybacks have meant that earnings per share — and the firm’s dividend — have continued to rise, regardless of falling sales, rewarding shareholders’ loyalty.

Can this balancing act continue? Rising debt costs could put pressure on the situation, as could a more rapid decline in sales.

However, I suspect BAT will continue to reward investors with an above-average dividend yield for some time to come, thanks to its global scale and profitability.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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