In spite of this healthy rise, I still think the stock offers considerable value. Before explaining why, let’s take a look at the most important numbers from today’s statement.

Back on track

Revenue increased 4.1% to £12.1bn at constant currency rates over the first six months of 2019, with growth elsewhere more than offsetting the 3.5% decline in cigarette volumes seen over the period. 

It’s particularly worth highlighting the 27% rise in sales of the company’s ‘New Categories’ products (to £531m) since it’s this part of the business that will play an increasingly important role in British American’s ability to continue raking in cash going forward.  

Broken down, sales of Tobacco Heating, Vapour and Modern Oral products rose 4% (£301m), 58% (£183m) and 284% (£47m) respectively. With further launches planned in H2, British American believes it’s now back on track to hit the middle of its targeted 30%-50% growth range in this area.

Despite increased investment in these new products, adjusted operating profit was also up 5.9% at constant currency to £5.21bn. Encouragingly, this number was a slight beat on the £5.14bn expected by analysts.

Still cheap

Considering the above, it’s perhaps no surprise that the shares were up over 6% this morning. That’s not to say, however, that prospective investors should worry about missing the boat. Even after taking today’s gain into account, the stock is still around 40% lower in price than it was a couple of years ago.

I think the market is too pessimistic on British American. A price-to-earnings (P/E) ratio of just 9 at yesterday’s close is far below its five-year average valuation of 16.5. Having said that, it’s now targeting “high-single-figure adjusted earnings growth” for the full year, I’m wondering if today’s rise may be the beginning of a sustained (albeit very gradual) recovery. 

Let’s not forget British American’s income credentials either. A proposed 203p per share total dividend in 2019 gives a yield of 6.5%. That’s clearly way higher than the 4% median across the index, but not so high that a cut looks likely, at least for now. Since it remains confident of generating more than £1.5bn in free cash flow in 2019 even after the payment of dividends, I think those invested purely for the quarterly cash payouts can sleep soundly.

While the decline of traditional smoking continues in the West, it’s also worth remembering that approximately 1.1 billion people in the world still engage in the habit and that numbers are actually increasing in some countries due to population growth. This surely makes companies like British American far more defensive than your typical technology play whose clients will quickly move on to different products or services at the drop of a hat.

Of course, there are still challenges ahead.

For one, the rising popularity of next-generation products won’t be going unnoticed by the US Food and Drug Administration. In addition to the likelihood of further regulation, the FTSE 100 member must contend with competition from rivals such as Philip Morris whose recent shipment volumes have been better than those reported today.

Nevertheless, based on these half-year numbers and its lowly valuation, I continue to be bullish on British American’s future.

The post This cheap FTSE 100 dividend stock still looks a great buy to me appeared first on The Motley Fool UK.

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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.

BATS out of hell

Stock of the millennium is British American Tobacco (LSE: BATS) according to new research from investment platform AJ Bell. Since 31 December 1999 it has grown a whopping 1,008%, assuming all dividends reinvested for growth. This may come as a surprise to some, because in many respects tobacco is a dying industry. At the start of the millennium, 26.8% of UK adults and 23.2% in the US were smokers. By 2016, those figures had fallen to 15.5% and 15.1% respectively.

It is a different story in China where 30% of adults smoke, including 53% of men. Overall volumes are still falling despite emerging market demand, but British American Tobacco has pricing power and is migrating smokers to higher-margin products. It also has a dominant market position after last year’s acquisition of Reynolds American Inc.

Smoke and fire

Some investors do not touch tobacco but if you do, the case for British American Tobacco remains strong with forecast margins of 38.9% and a 301% return on capital employed. It throws off cash, which it returns to shareholders through share buybacks and its juicy dividend. This has grown every year since 1999, and currently offers a forecast yield of 5% for 2018, with cover of 1.5. Smoking is addictive, giving company and investors a safety net if the global economy slips up. It is also cashing in on the growing popularity of e-cigarettes.

British American Tobacco’s earnings per share (EPS) are forecast to rise 6% this year and 9% in 2019, and it looks a bargain trading at 13.7 times earnings. Market volatility has knocked its share price, which is down almost 22% over the past year, but this looks like a buying opportunity to me.

Household goodie

We don’t need another hero – oh yes we do! Household goods giant Reckitt Benckiser Group (LSE: RB) is the FTSE 100’s second greatest millennium star, returning a total of 922% so far. Air Wick, Dettol, Durex, Finish, Harpic, Nurofen, Vanish are just some of the reasons why.

Performance has disappointed lately, with growth trailing rival Unilever. Problems include £300m consumer redress in Korea, a US Department of Justice investigation, and last year’s cyber attack. Management also has its work cut out turning around recent acquisition, formula milk specialist Mead Johnson, although £300m of cost synergies by 2020 gives it a juicy target to aim at.

Recovery play

The long-term story is rock solid, despite recent shaky news flow. The share price is down 17% in the last year as a result, and again, I see a buying opportunity. Reckitt Benckiser trades at a forecast 18.2 times earnings, bargain territory for this stock, which routinely knocks around the 25 mark.

The future looks bright for this bargain defensive stock with EPS forecast to grow 5% this year and 7% in 2019, lifting the yield to 3%. I expect the success story to continue. The recent dip allows you to jump on board at a decent price.

The post These 2 FTSE 100 dividend and growth heroes are the “stocks of the millennium” appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. 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.

However, in the last month, share price weakness has begun to appear in the defensive segment of the market, and this weakness has been exacerbated in the last week after Donald Trump’s victory in the US election.  

Here’s a look at why companies such as Unilever (LSE: ULVR) and British American Tobacco (LSE: BATS) have all of a sudden lost their shine but also offer good opportunities to buy.

Inflation

With the Trump victory catching many off guard, investors have scrambled to reposition their portfolios in the last few days. Trump has promised to cut taxes and spend heavily on infrastructure and as a result, the market has come to a near-universal conclusion that inflation is likely to surge higher.

Bonds perform poorly in an inflationary environment because their ‘fixed’ interest payments are worth less to investors as inflation rises, so it’s no surprise that bonds have been sold off sharply since last week. However when bond prices fall, their yields rise. That means demand for high-yielding defensive equities, which are often viewed as alternatives to bonds for income-focused investors, can be negatively affected. 

This explains why many defensives have slumped in the last few days. The market has focused on sectors that could benefit from the President-elect’s policies, rotating into cyclical stocks and leaving behind the ‘expensive defensives.’ 

Value appearing

So should you be worried that many key dividend stocks have fallen 10%-15% in the last month? In my opinion, no. Instead, see it as an opportunity.

Many defensive stocks such as Unilever and British American Tobacco have generated excellent returns for their shareholders over the long term so I believe these kinds of stocks make excellent core portfolio holdings.

Demand for such companies will fluctuate over time, depending on market sentiment. However, if you can build positions in high quality defensive companies when they’re offering value, it’s likely you’ll be rewarded over the long term.

Are defensive stocks now offering good value? To my mind, yes.

Take Unilever. Just over a month ago the company was trading at 3,800p. However, after a sizeable 17% fall, the stock can now be bought for around 3,150p. This means that you can now buy the stock with a dividend yield of 2.8% instead of 2.3%, quite a big difference for an income investor. While Unilever’s P/E ratio of 21.3 is still above its 10-year average of 15.1, I’d be a lot more comfortable buying the stock at 3,100p than I would be at 3,800p.

Similarly, a month ago British American Tobacco was trading at 5,100p, yet now can be bought for 4300p. That 16% fall means the company’s dividend yield has risen from 3% to 3.6% and therefore the tobacco giant is now looking a lot more attractive from an income point of view. These are just two and there are many others.

Defensive companies may have further to fall, but if you can capitalise on share price weakness, you should be rewarded over the long term.

The post Why defensive stocks are falling rapidly after Trump’s victory appeared first on The Motley Fool UK.

More reading

• I’m targeting £9,089 a year in dividends from £20,000 in this powerhouse FTSE income share
• Got a spare £3 a day? Here’s the passive income you could earn from it!
• How to earn £596 a year in second income from 1 FTSE stock
• How much would it take to turn an ISA into a £1,000-a-month passive income machine?
• How much do you need in a Stocks and Shares ISA to aim for an annual income of £39,477?

Edward Sheldon has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

However, fitting his more down to earth investing persona, Woodford had a slightly more boring response when this question was put to him earlier this year and replied: “Probably, if I were to put my hand up, the biggest single mistake I’ve made in my career is not having enough tobacco exposure.”

High returns

This is a big statement from Woodford considering two of the five largest holdings in his flagship Equity Income Fund are tobacco stocks. But, if we look at the 80%-plus return these two shares, British American Tobacco (LSE: BATS) and Imperial Brands (LSE: IMB), have provided over the past five years, it’s understandable if he felt he could have invested even more money in them.

Of course, we’re more concerned about the next five, 10 and 20 years, not the past five, so what does the future look like for these giants?

Unless cigarettes magically lose their addictiveness overnight, all signs point to a solid future for both BATS and Imperial in my eyes.

The main reason is that addictive nature. People buy cigarettes in good and bad economic times alike and largely remain loyal to their favoured brands. This means tobacco companies enjoy incredible pricing power. We can see this in action in the latest half-year results for BATS, where adjusted operating margins were 37.4%, and Imperial, where they were 46.4%.

Incredible margins such as these mean both companies are as close to cash generating machines as you’re likely to find in the FTSE 100 these days. And although each is reinvesting significant sums on acquisitions, there’s still plenty of cash left over to return to shareholders. Dividends at BATS now top 3.2% while Imperial shares offer a yield slightly above 3.6%.

Rising consumption

And, despite major public health campaigns against smoking across the developed world, global tobacco consumption continues to rise as increasingly wealthy consumers in developing nations clamour for more cigarettes. The World Health Organisation estimates that 80% of the world’s 1bn smokers live in developing nations and both BATS and Imperial are targeting these countries as critical markets for the years to come.

The bad news for investors on the outside looking in is this combination of stable revenue from the rich world, growth markets in the developing world and high dividends hasn’t escaped other investors’ notice. Shares of BATS are now quite highly valued at 19.6 times forward earnings while Imperial trades at 16.6 times 2016 earnings.

But analysts are forecasting double-digit earnings growth for both companies over the next two years. And with their history of rising dividends, the long-term potential among the growing middle classes from Brazil to China and a product that sells in recessions and boom times alike, I have to agree with Neil Woodford that BATS and Imperial should continue to reward investors for years to come.

The post What you can learn from Neil Woodford’s biggest investing mistake appeared first on The Motley Fool UK.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Straight, no chaser

Spirits giant Diageo (LSE: DGE) is still suffering from a mighty hangover that was acquisition-hungry former chief executive Paul Walsh’s legacy. He was wise enough to bail out before the party came to an abrupt halt, leaving successor Ivan Menezes to develop a more sober strategy. Unfortunately, Diageo no longer packs the punch it once did, as it battles against headwinds such as the Chinese crackdown on gift-giving, the wider emerging market slowdown, and slippage in North American sales.

Falling revenues mean that Diageo still trades at a pricey 21 times earnings, despite its straightened circumstances. The dividend is better than it was, and investors will have raised their glasses to the recent 5% hike in the interim payout to 22.6p a share, but it hardly excites at 3%.

On the upside, three years of falling earnings per share (EPS) are likely to reverse in the year to 30 June 2017, with forecast growth of 9%. This is primarily due to Diageo’s cost-cutting plans: forecast revenues of £11bn are way down on the near-£16bn investors were toasting in the year to June 2015. I may sound flat on the stock but I’m not as it has a strong portfolio of global brands and improving growth prospects, so now might be the perfect time to add a splash to your portfolio.

Slow burner

British American Tobacco (LSE: BATS) is due a bad run but there’s little sign of that happening, with its upwards share price surge lasting for a decade or more. Defensive in bad times, the stock also manages to put on a fine attacking display during the good times. It’s up 54% over the last five years, and will have TRIPLED your money over the last decade, and that’s without taking into account its dividend.

Top dividend investor Neil Woodford knows a great income/growth play when he sees one and he’s a long-term fan, with good reason. Although the current yield is a relatively modest 3.66% the main reason is that the share price has been growing so rapidly that even a progressive board struggles to keep up. In February, it showed willing by increasing the dividend by 4%.

British American Tobacco’s recent strong growth has come despite currency headwinds, which reduced organic revenue growth of 6.1% at constant exchange rates to just 1.7%. Although smoking is a dying market and I’m not convinced that vaping will come to its rescue, British-American Tobacco is offsetting that by expanding its market share and successfully promoting its premium brands. It isn’t cheap at 20 times earnings but unlike Diageo, recent performance has justified its valuation.

Future prospects are promising with forecast earnings per share growth of 12% and 8% over the next couple of years. If you buy both these stocks, you combine the heady prospect of a recovery play with the intoxicating aromas of a company that’s already there.

The post A drink and a smoke: Diageo plc and British American Tobacco plc could be just the kick your portfolio needs appeared first on The Motley Fool UK.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.