It’s been a challenging three months for the FTSE 100, with the UK’s leading share index being down 3% during the period, as uncertainty surrounding Russia and the Middle East has caused investors to adopt a more risk-off attitude. However, British American Tobacco (LSE: BATS) (NYSE: BTI.US) has seen its share price remain flat during the same period, as the company continues to drive through a sound strategy that looks set to deliver long-term growth. Indeed, British American…
It’s been a challenging three months for the FTSE 100, with the UK’s leading share index being down 3% during the period, as uncertainty surrounding Russia and the Middle East has caused investors to adopt a more risk-off attitude. However, British American Tobacco (LSE: BATS) (NYSE: BTI.US) has seen its share price remain flat during the same period, as the company continues to drive through a sound strategy that looks set to deliver long-term growth. Indeed, British American Tobacco could prove to be a winning investment in the current climate. Here’s why.
Perhaps the key attribute of British American Tobacco as an investment is the attractive mix of growth potential and defensive qualities that it offers. Certainly, there are companies in the FTSE 100 that, during periods of strong economic growth, will deliver earnings growth that is superior to that of British American Tobacco. However, British American Tobacco is a stock for all seasons, in terms of it being able to grow its bottom line at a consistent rate come economic rain or shine.
A key reason for this is price increases; with tobacco being an addictive product, British American Tobacco (and its peers) are simply able to raise prices so as to increase top line and, subsequently, bottom-line growth. With further efficiencies to come through in terms of updated plant and machinery, as well as a leaner cost base, British American Tobacco looks all set to deliver a reliable earnings growth profile moving forward. Indeed, this consistency of growth could prove to be a highly attractive quality that investors are willing to pay a premium for during uncertain economic times, as is currently the case.
In addition, British American Tobacco combines reliable growth numbers with top-notch defensive qualities. For instance, the stock has a beta of just 0.8, meaning that for every 1% fall in the wider index British American Tobacco’s share price should (in theory) fall by just 0.8%. This quality should give investors increased confidence in the resilience of the company’s share price during periods of volatility, with British American Tobacco clearly having the potential to outperform the wider market during a downturn, which equates to strong defensive qualities.
As well as offering a potent mix of reliable growth and defensive qualities, British American Tobacco also has the potential to gain a foothold in what could turn out to be the future of the tobacco industry: e-cigarettes. With its Vype brand making good progress and having been around for a year, British American Tobacco, as well as offering reliable growth, could also offer much stronger growth than the market realises, as it begins to dominate a new and increasingly popular market in smokeless nicotine products. For now, though, the mix of reliable growth and defensive qualities is the big reason why British American Tobacco could outperform the wider index going forward.
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Peter Stephens owns shares in British American Tobacco. The Motley Fool has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.