Rumours emerged this week that British American Tobacco’s (LSE: BATS) proposed takeover of Reynolds American (NYSE: RAI) could be about to flounder, a potentially-significant development for both firms’ long-term growth outlooks.
Sources close to the acquisition — which will see British American Tobacco hike its current 42.2% stake in the US giant, if completed — said that a higher sum than the offered $47bn will be required to seal the deal.
It’s easy to understand the London manufacturer’s eagerness to snap up its transatlantic rival. Solid demand for Reynolds American’s hot cartons like Newport helped power net sales 1.4% higher during July-September, to $3.21bn. And any deal would also bolster British American Tobacco’s recent entry into the fast-growing vapour segment.
Delays and outright rebuttals are part and parcel of M&A discussions of course, meaning that investors shouldn’t read too much into recent reports. But regardless of British American Tobacco’s attempts to raise exposure to the huge US market, I believe the smoking star remains a great selection for those seeking reliable earnings growth.
While total cigarette volumes may be falling, British American Tobacco is able to keep growing sales thanks to its huge presence in emerging markets, regions where demand continues to hold up. And industry-leading labels like Pall Mall and Kent are helping the UK firm to grab market share from rivals. Sales volumes of these sticks jumped 9.8% between January and September.
It comes as little wonder that the City expects earnings at British American Tobacco to explode in the coming years, and rises of 18% and 14% higher have been pencilled-in for 2016 and 2017 respectively.
Such figures create P/E ratios of 17.3 times for 2016 and 15.1 times for next year. This is terrific value in my opinion given the tobacco play’s exceptional defensive qualities. And dividend yields of 3.8% and 4.2% for this year and next should attract serious attention from value hunters too.
Global star
Household goods manufacturer Reckitt Benckiser (LSE: RB) shares many of the same qualities as British American Tobacco.
The unrivalled desirability of their wares allow them to lift prices to mitigate margin pressure. Both companies boast huge geographic diversification to lessen the impact of tough conditions in one or two markets (indeed, Reckitt Benckiser sources almost a quarter of revenues from North America and a third from developing nations). And the huge sums invested in product innovation and marketing is helping revenues at the FTSE 100 giants to keep growing.
These factors are expected to create further bottom-line growth at Reckitt Benckiser in the medium-term at least. Indeed, the Durex and Vanish maker is predicted to follow earnings growth of 13% in 2016 and 15% in 2017, figures that produce P/E multiples of 23.3 times and 20.3 times. And Reckitt Benckiser carries dividend yields of 2.2% for 2016 and 2.5% for next year.
While Reckitt Benckiser may not be packing the same sort of value as British American Tobacco, I reckon both shares are great selections in times of macroeconomic and geopolitical uncertainty such as these.
