The Motley Fool

British American Tobacco and Imperial Brands: which one would I buy?

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.

Person smoking cigarette
Image source: Getty Images.

It’s not a good day for nicotine stocks. Major FTSE 100 cigarette manufacturers like British American Tobacco (LSE: BATS) and Imperial Brands (LSE: IMB) are some of the biggest losers today. Their share prices have tumbled more than 6% so far, as the Biden administration mulls capping nicotine content in cigarettes. 

This can be yet another blow to the tobacco industry, which has been facing tighter regulations for a long time now. In that sense, both the tobacco stocks mentioned above are in the same boat.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

But there are ways to distinguish between them.

Comparing performance

The most obvious is performance. Both companies did well as far as operating profits go last year. While British American Tobacco saw a 10.5% increase in 2020, Imperial Brands showed a huge 24% rise for the year ending September 30 2020. 

I think because there’s a difference of a quarter in reporting periods, Imperial Brands had some advantage over British American Tobacco, whose performance showed a fuller impact of coronavirus. 

Forays into new products

Another way I compared them was in terms of the performance of their new products, like vapes. With the increasing clampdown on nicotine, alternative products have seen rising popularity and tobacco companies are pivoting in that direction too. 

British American Tobacco is hopeful of growth in these new categories. So far it’s a small-but-revenue-generating segment. By 2025, it hopes that the segment will contribute £5bn to revenues. Imperial Brands, on the other hand, is struggling. It has pulled back investments from its next-generation products and appears to be restrategising its approach to them.

The all-important dividend

A third distinguishing feature for these FTSE 100 giants is their dividends. Both boast high yields. British American Tobacco has a dividend yield of 7.4% right now, and Imperial Brands is at a huge 12.4%. 

These are a saving grace at a time when both stocks’ prices are falling. In fact, they may even more than make up for the fall in share prices. According to my rough estimates, the share price fall on average in 2021 for Imperial Brands is less than the dividends paid. As a result, I end up with around an 8% net gain.

The same isn’t true for British American Tobacco, however. If I had bought its shares at the average price in 2020, chances are I would be sitting on a 5.6% decline on my investment, even after accounting for its hefty dividend. 

Weighing up

In sum, performance-wise there’s not much difference between the two tobacco companies. British American Tobacco, at least for now, appears to have a better handle on future growth through increased revenues from new categories. And Imperial Brands offers far better returns on capital. 

Which of the two I’d buy in this case,depends on my projections for my investing time horizon as much as it does on past performance. Today, however, I’m not tempted by the share price fall in either. 

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.