Could You Double Your Money With British American Tobacco Plc?

The FTSE 100 has risen 28% over the last five years. However, some companies have done much better than others. In fact, more than a third have seen their shares rise 100% or more.

I’m currently looking at some of your favourite blue chips and analysing their prospects for doubling your money in the next five years. Today, it’s the turn of British American Tobacco (LSE: BATS) (NYSE: BTI.US).

The last five years

BAT’s shares haven’t quite managed to double over the last five years, but have beaten the FTSE 100 threefold with an 83% increase, representing a compound annual growth rate (CAGR) of getting on for 13%.

Earnings per share (EPS) have increased at a CAGR of about 11%, with the remainder of the share price rise coming from an increase in the price-to-earnings (P/E) ratio. BAT has been trading at an average P/E of 16 since its final results were released in February this year, while the average P/E during the same period five years ago was 13.8.

The trend in BAT’s annual EPS growth doesn’t appear to bode well for a double-you-money future: +19% (2009), +15% (2010), +11% (2011), +5% (2012) and +5% (2013).

The next five years

For BAT’s shares to double in the next five years the declining EPS growth trend would need to reverse significantly. A 15% five-year CAGR would be required at a maintained P/E of 16. Anything less than 15% and the P/E would have to rise to make up the difference.

As things stand, EPS is actually set to fall for the current year, by 4%, giving a P/E of 17 at today’s share price of 3,580p. This means the EPS CAGR for the subsequent four years would need to rise to 20% at a maintained P/E of 17.

Given that tobacco companies are struggling to grow volumes in the face of regulation and increasing health-consciousness in the developed world, an EPS CAGR of anywhere near 20% looks just about impossible to me.

Furthermore, with the P/E having already risen from 13.8 to 17, there appears to be little scope for the rating to go a great deal further higher.

On this basis, I think we’re unlikely to see BAT’s shares rise 100% over the next five years. Indeed, I would expect BAT to struggle to match the 83% increase of the last five years.

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G A Chester has no position in any shares mentioned. The Motley Fool UK 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.