The British American Tobacco (LON: BATS) share price has done well this year, making it one of the best performing companies in the FTSE 100 index. It has jumped by 32% this year while the FTSE 100 index has risen by less than 10%.
Growth and dividends
BAT’s stock performance has coincided with the ongoing strong performance of other companies in the tobacco industry.
Altria, one of the biggest tobacco companies, and the manufacturer of Malboro, has risen by over 36% this year. Similarly, Philip Morris International (PM) has soared by almost 40%.
This performance is mostly because investors have reduced their focus on Environment, Societal, and Governance (ESG) issues. As a result, ESG funds have shed billions of dollars in assets in the past few months.
Tobacco companies were some of the most avoided companies by ESG investors because of their impact on society. Most tobacco companies are accused of causing health issues, mistreating tobacco farmers, and contributing to carbon.
British American Tobacco is also loved by investors who are looking for dividends. In addition to the stock rising by over 32% this year, the company is one of the most generous in terms of dividend payouts.
BAT has one of the highest dividend yields in London. It pays about 9.50%, meaning that a £10,000 investment will bring in £950 in dividend payouts. Combined with dividends, BAT’s total return has risen to over 40% this year, outperforming the S&P 500, which has returned 18%.
New categories doing well
BAT’s performance is notable because of the challenges the company has gone through in the past few years.
These woes came to light in December last year when the company caught the market by surprise after deciding to write down $31.5 billion of its US business. It attributed this write down to the slowing economy, the ongoing shift towards vaping, and the rising competition in the country.
$31.5 billion is a lot of money for a company whose market cap stands at about $85 billion after its stock surge this year.
The stock has done well even after the company’s financial results came out short than expected.
Its first half financial results showed that the company’s revenue dropped by 8.2% to £12.34 billion. This revenue dropped even after the number of consumers of its smokeless products jumped to over 26.4 million.
BAT’s revenue from new categories, which includes vapes, also dropped by 0.4% to £1.65 billion while its profits from operations dived by 28.3% to £4.2 billion.
Its performance is a reflection that the tobacco industry is still seeing slow growth globally. A key factor is that the number of smokers is not growing. The situation is even worse among the younger generation.
A good example of this is that BAT’s revenue slowdown was mostly because of its US business whose combustibles revenue dropped by 8.5%. The rest of world revenue rose by just 2.2% during the first half of the year.
Another example is that the revenue slowdown is spread across other companies in the tobacco industry. Altria’s revenue dropped to $5.2 billion in the last quarter from $5.4 billion in the same period in 2023.
The only company that had growth in the quarter was Philip Morris whose revenue rose from $8.9 billion to $9.46 billion.
On the positive side, British American Tobacco’s new categories business is now accounting for a big share of its total revenue, which is its goal. It now accounts for about 18% of the total revenue and the management expects the figure to continue rising.
Good valuation but risks remain
BAT has attractive valuation metrics. It trades at a forward non-GAAP PE ratio of 8.30, lower than the industry average of 18. It also has a forward GAAP PE multiple of 10, lower than the industry’s average of 20.
Tobacco companies always attract lower valuation multiples compared to other firms because of their slow growth and the fact that the sector is seen as toxic.
There are two main risks for BAT. First, it is unclear whether the company’s growth in the new categories will be long-lasting. Second, over time, it will see weaker cigarette growth since many young people are not interested in smoking.
British American Tobacco stock analysis
Turning to the weekly chart, we see that the BAT stock price has been in a strong bull run this year. It has jumped from a low of 2,076p in January to a high of almost 3,000p.
The stock formed a golden cross pattern as the 200-day and 50-day moving averages have made a bullish crossover. In most periods, this is one of the most popular bullish signs.
The stock has also formed a cup and handle pattern, a popular bullish sign. Therefore, the stock will likely continue rising as bulls target the upper side of the cup at 3,023p. It will then consolidate to form the handle section and then resume the uptrend.
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