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Is the best performing FTSE 100 stock of the last 50 years finally running out of puff?

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Here’s your starter for 10. Can you name the best performing FTSE 100 stock over the last 50 years? The answer is… British American Tobacco (LSE: BATS).

Red hot

The cigarette maker has offered a literally unbeatable combination of share price growth and dividend income over the last half a century, according to Hargreaves Lansdown.

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If you had invested £1 in the stock in October 1969, your investment would be worth an incredible £3,440 today. If you’d invested £1 every single a day, your money would have grown into more than £24m. That’s not a bad return for a total investment of £18,250.

This shows the power of investing in stocks and shares over cash – £1 paid into the average easy access savings account would be worth just £12.96. Of course, it helps if you pick the right stock. British American Tobacco was that stock.

On the slide

We all know past performance is no guide to the future. The law of averages suggests BAT will not be the best performing stock over the next 50 years

There are signs its star is beginning to wane. Over the last five years, the FTSE 100 has grown by around 15%. In the same period, British American Tobacco fell 20%. It’s down 44% measured over three years.

Smoking is slowly dying, at least in the developed world. The number of UK smokers has fallen by a fifth in the last five years, according to Public Health England, leaving around 6m, with smoking among 18-to-24 year-olds falling fastest.

It’s the same pattern across the developed world, with the exception of France, naturally, but there are even signs of a decline over there.

A fit of the vapours

British American Tobacco has fought back by targeting the developing world, where smoking rates are higher, cutting costs to “create a stronger, faster, more agile organisation,” and focusing on ‘New Categories’ such as vaping, tobacco heating and oral brands.

The strategy has paid off, with first-half revenues up 4.1% to £12.1bn at constant currency rates. Total cigarette volumes declined 3.5% to 336bn sticks, but that’s still a lot of sticks. Sales of New Categories products jumped 27% to £531m, but these are now facing a serious backlash, as the US Food and Drug Administration adopts a hard line on vaping.

Originally touted as a less unhealthy alternative for smokers who couldn’t quit, it is now seen as a gateway tobacco product for teenagers, seduced by flavours such as ‘gummy bear’ and ‘scooby snacks’. There are now serious concerns the group’s profits will go up in smoke as a result of this negative shift.

Those health concerns aren’t going away. But if tobacco stocks are something you invest in, you may still be tempted by today’s entry price, with British American Tobacco now trading at just nine times forward earnings and yielding 7.6%, with cover of 1.5. Projected earnings growth of 9% and 8% over the next couple of years look steady too.

The £63bn group is up for the fight, taking the axe to 2,300 management jobs to simplify its structure and reinvest in new products. Tobacco companies may be pariah stocks but, as the last 50 years have shown, they can still make money.

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Harvey Jones 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.

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