To say that the share price of tobacco giant and FTSE 100 constituent British American Tobacco (LSE: BATS) has been running out of puff over the last 18 months or so is putting it mildly. The stock has pretty much halved in value since early June 2017.
Based on today’s pre-close trading update for the second half of its current financial year, I think this fall looks overdone. Moreover, I continue to regard the owner of brands such as Lucky Strike and Dunhill as a solid choice for dividend hunters.
Someone coming to the stock for the first time may be forgiven for wondering what all the fuss is about. According to the company, it “continues to perform well” and deliver “good adjusted revenue and adjusted operating profit growth“, albeit with a weighting to the second half of the financial year.
While the waning popularity of tobacco is widely known, the £63bn cap did report that it had seen decent growth across its tobacco heating, vapour and oral categories. The first two of these are expected to deliver £900m in revenue in the current year with Glo — it’s flagship heating product — now selling in 16 markets around the world and vaping brand Epen3 recently launching in New Zealand and France.
Although cigarette volumes continue to fall in the US (an industry decline of between 4% and 4.5% in 2018 was predicted), British American Tobacco did say that business here was still doing fine with revenues continuing to grow at constant currency. The firm also remarked that it was “well placed” to cope with the proposed regulation of menthol cigarettes across the pond.
Looking ahead, British American Tobacco revealed that it would exceed its “high single figure” target for earnings per share growth, albeit with a currency headwind of somewhere in the region of 6%. Importantly, guidance for the full year was left unchanged.
Aside from today’s fairly reassuring update, there are two reasons why I’d consider buying this stock right now. As you might expect given the sustained fall in its share price, the first of these relates to the company’s valuation.
Based on current analyst projections, the stock can be picked up for a little under nine times forecast earnings for the next financial year. That’s pretty cheap relative to the market as a whole — even after the recent Brexit-related wobble — and very similar to its aforementioned industry peer, Imperial Brands, which I’m also bullish on.
Valuation aside, the dividends on offer remain as attractive as ever with the company forecast to return a total of 209.8p per share to its owners next year. At today’s 2779p share price, that’s a stonking 7.6% dividend yield — one of the highest available in the FTSE 100. With CEO Nicando Durante also stating today that the firm would maintain a payout ratio of “at least 65%” to shareholders, British American Tobacco’s reputation among those looking to generate an income from their portfolios looks assured.
While nothing can be guaranteed when it comes to investing, particularly given the current political turmoil we’re all witnessing at Westminster and the influence this could have on markets, this is one stock that I think can still be safely held as part of a fully diversified portfolio.
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Paul Summers has no position in any of the 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.