As the economy gears up for recovery, I am considering what UK shares to buy now for my Stocks and Shares ISA.
I already own shares of one leading UK company and am considering buying more for my ISA today. Here I lay out four reasons I see to buy – and one notable risk.
The company is British American Tobacco (LSE: BATS). Its shares are down by 9% over the past year.
Although the shares have moved lower over 12 months, the company’s profit momentum is positive. Last year, it recorded a 10.5% increase in operating profits, or 4.8% on an adjusted basis.
The company’s portfolio of brands includes iconic cigarettes like Peter Stuyvesant, Pall Mall, Rothmans, and Lucky Strike. But lately it has been developing non-combustible brands too. Vuse, Glo, and Velo might not yet be as familiar as Lucky Strike. But with the company’s proven brand building capability, I expect its portfolio to remain relevant.
Brands help to give a product pricing power. While that is useful for any company, it can be particularly helpful in an industry threatened by declining volumes, like cigarettes. Pricing power can help mitigate volume decline. That is one reason I see BAT as a UK share to buy now for my ISA.
BAT generates a lot of free cash flow. Now, it does have a large debt pile to service. At the end of last year, adjusted net debt stood at £39.5bn. Nonetheless, the strongly cash generative nature of its business has enabled it to service debt while growing its dividend in recent years.
Last year’s raise was 2.5%. The annual dividend per share is 215.6p. The current BAT share price thus offers a yield of 7.5%.
The company reckons it is currently delivering £660m of cost savings under its “Project Quantum” initiative. I always take such claims with a pinch of salt. It can be hard to know if savings are here to stay or whether cuts could weaken the business over time.
But one positive indicator of the business’ growing efficiency is its operating margin. Last year that stood at 38.6%. That was up from the year before. Factors such as exchange rates can weigh on a global business like BAT. But overall I think the strong profit margin partly reflects the company’s cost focus.
UK shares to buy now for my portfolio – or not?
While I find those four factors positive, there are risks for BAT shares.
One key risk I see that weighs against the shares is the shift away from smoking. That most obviously affects older product formats like cigarettes. But I think wider concerns about tobacco could ultimately limit the appeal of next gen products such as vaping. Without its mammoth revenues, the company’s cash generation would fall. That could affect dividend coverage. Despite the attractive dividend now, I see a risk that BAT could one day reduce it. Competitor Imperial Brands’ did so last year.
My next move
I do see risks here. But I consider BAT as a UK share to buy now for my ISA. I am considering acting on this analysis by increasing my position.
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christopherruane owns shares of British American Tobacco and Imperial Brands. 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.