The share price of British American Tobacco (LSE: BATS) leapt nearly 5% in early trading today as investors reacted warmly to the group’s unexpectedly solid increase in underlying revenue and profits in the first half of 2018.
Despite this rise in its share price though, the group’s stock still trades at just 14 times consensus forward earnings and still kicks off a very attractive 4.9% dividend yield. While investors may be squeamish about investing in tobacco stocks, I think this high yield, attractive valuation and rising earnings still makes it one FTSE 100 stock to consider for the years ahead.
In fact, in Q1 the group’s revenue, excluding the acquisition of Reynolds American, grew by a respectable 1.9% in constant currency terms while operating profits were up by 2.4% on the same basis. But adding in the purchase of the parts of Reynolds American it didn’t already own is what makes BATS truly exciting.
On this statutory basis, revenue was up a full 56.9% to £11.6bn while operating profits leapt 72.4% to £4.4bn. Of course, this growth will naturally slow as it won’t be making anymore huge acquisitions any time soon. But there is still great long-term potential to wring increased profits out of Reynolds American through cost-cutting, improved leverage with suppliers and customers, and cutting investments in low-growth brands in favour of core names like Lucky Strike and Camel.
Now, it’s unwise to discuss investing in tobacco stocks without discussing the elephant in the room – declining rates of smoking. This is certainly an issue, but despite being an industry in decline, there is still potential for revenue and sales growth as the sector’s biggest players buy out smaller competitors. This is the position BATS is in and with high margins and huge cash flow I’d expect it to continue making deals once it’s deleveraged its balance sheet following the Reynolds American purchase.
With this being the case, I think it still has the potential to continue hugely rewarding shareholders for years to come and that its current price is quite attractive.
A faster-growing option
Another reasonably priced stock that’s caught my eye is small- and mid-cap broker Numis (LSE: NUM), whose shares trade at just 16.4 times forward earnings despite rising over 80% in value in the past year.
This rapid rise in the group’s share price looks quite justified to me as the group has been growing quickly by carving itself out a leading position in corporate broker services for the small- and mid-cap companies that bulge bracket investment banks have ignored in recent years.
In the half year to 31 March, the group’s revenue increased 41% to £74.1m while pre-tax profits grew 86% to £19.5m. This increase in sales and profits was led by a rise in activities like IPOs and secondary fundraisings by its clients, as well as an uptick in M&A advisory services.
Looking ahead, there are a few potential worries for Numis such as the MiFID II restrictions on how clients pay for research, as well as the company’s obvious reliance on healthy corporate earnings and upbeat financial markets. However, with a proven growth strategy, plenty of cash on hand and a respectable 2.8% dividend yield, I think Numis is still attractively valued considering its long-term prospects.
