British American Tobacco plc vs BT Group plc which to buy for your ISA?

British American Tobacco plc (LON: BATS) and BT Group plc (LON: BT.A) are both attractive ISA investments but which should you choose?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

British American Tobacco (LSE: BATS) and BT Group (LSE: BT) are both highly defensive companies that might be attractive buys for your ISA. But if you had to pick just one, which should you choose? 

Trying to pick between these two dividend stalwarts isn’t easy. On paper, they both look to be perfect. Both companies have relatively defensive business models, predictable cash flows, and leading market positions. What’s more, both BT and British American have a policy of returning extra cash to investors and their dividend yields are attractive at 3.6% and 4.7% respectively. 

However, even though these companies might look similar on paper, they’re very different in practice. For example, BT is the UK’s leading telecommunications company, with billions of pounds of telecoms infrastructure built up over decades. Meanwhile, British American sells cigarettes, a business that’s considered by many to be in terminal decline. 

The pros and cons 

BT’s presence in the UK’s telecoms market is arguably its greatest strength. It would be impossible for a competitor to arrive and challenge the firm’s dominance overnight and it would take decades to build and receive the necessary approvals for such a large national telecoms network. That said, BT does have its problems. Competitors are nibbling away at the business, forcing the company to spend more on advertising, and calls for the company to be broken up are growing stronger. Nonetheless, for the time being, BT looks to be one of the UK’s most defensive businesses. 

British American on the other hand, dominates the tobacco markets it operates in, but changing consumer habits are weighing on sales. For the time being, the company has been able to improve margins by cutting costs and hiking prices, which seems to be working. However, the company’s recent deal to acquire the rest of Reynolds American that it doesn’t already own shows that management is running out of options for organic growth. 

Weighing up valuation 

Both BT and British American have their problems, but when it come down to valuation, there’s one clear winner: BT is the cheaper of the two. Shares in the company currently trade at a forward P/E of 11.6 and City analysts have pencilled in earnings per share growth of around 10% for the next two years. 

Meanwhile, shares in British American currently trade at a forward P/E of 18.3. Where British American stands out is growth. For 2017 City analysts are expecting the firm to report earnings per share growth of 16%, following growth of 19% last year. For 2018 analysts are expecting earnings per share of 308p, that’s up from 2012’s figure of 103p per share. It’s hard to argue against these growth figures. While British American’s outlook might not be as clear as that of BT, the company’s growth record shouldn’t be ignored. 

The bottom line

All-in-all, both BT and British American are attractive ISA investments, but based on British Amerian’s growth potential, I’d rather pick the tobacco producer than BT. 

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.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »