Recent Buy: BAT

Welcome to our stock series, where I let you in on why a company has made it on our watchlist or even in our portfolio. This time, I focus on BAT.

British American Tobacco

On November 13, 2018, we bought 75 shares of British company BAT. At a price of €33.20 we paid €2,490.00 plus €11.13 in order fees.






What is BAT?

BAT – or British American Tobacco – is one of the world’s largest tobacco businesses. The London-based company goes back to the early 20th century, when Imperial Tobacco Company from the UK and American Tobacco Company from the US founded it as a joint venture.

Today, BAT is well-known for classical cigarette brands just like Lucky Strike, Camel or Pall Mall. However, it also operates a fast-growing “Next Generation Products” business, which particularly includes tobacco heaters and e-cigarettes of brands such as Vype and Glo.

BAT is also broadly diversified from a geographic point of view. However, with its $54.5 billion acquisition of Reynolds American in 2017, the United States became by far the company’s single largest market.

BAT Revenues by Region
BAT Revenues by Region

Just like the entire tobacco industry, BAT is currently facing some major challenges. Advertising restrictions as well as an ongoing trend to an ever-healthier lifestyle hurt sales. Just visualize how few people are still smoking in the Western world nowadays. Furthermore, the US Food and Drug Administration’s aim to ban menthol cigarettes among others is giving all tobacco companies a hard time.

However, the tobacco industry is also blessed with multiple growth opportunities. In addition to e-cigarettes , there is still a lot of growth to be found outside the advanced economies. Cigarette sales in emerging markets might not be as profitable as in developed countries, but rapid population growth and a much higher rate of smoking promise a bright future for big tobacco. In addition, the increasing legalization of marijuana is creating an entirely new growth path for BAT.

Why BAT?

But could BAT also be a potential candidate for our portfolio? That I want to show you based on our stock screener. So, let’s go!

How cheap is BAT?

I think a company’s stock is cheap if its current PER is lower than its average PER (since 2004). In case of BAT, current PER is sitting at 9.5. This is less than its long-term average PER of 13.8.

BAT Factor 1
BAT Factor 1

Therefore, BAT’s shares are currently significantly cheaper than usual. I grant 14.1 bonus points.

How strong is BAT?

I think a company is strong if it’s able to increase its profits both long-term (since 2004) and medium-term (since 2011). In case of BAT, the lower of the two growth rates is 7.7% p.a. The company’s medium and long-term earnings growth is positive.

BAT Factor 2
BAT Factor 2

Therefore, BAT seems to be a very strong company. I grant another 7.7 bonus points.

How robust is BAT?

I think a company is robust if it’s able to continuously increase its profits over the long term (since 2004). In case of BAT, the maximum year-on-year drop in profits was 37% (FY2005). However, the company didn’t report any loss over the entire valuation period.

BAT Factor 3
BAT Factor 3

Therefore, BAT seems to be a robust company. I grant 4.4 minus points.

Is BAT currently a bargain?

I think a company is a bargain if its long-term trend in earnings growth (since 2004) justifies its current PER. In case of BAT, due to its robustness I would allow a PER of 14.3. This is more than its current PER (9.5).

BAT Factor 4
BAT Factor 4

BAT’s stock seems to be a real bargain now. Therefore, I only grant 3.7 minus points.

Jung in Rente Score

The result of our stock screener – the so-called “Jung in Rente” score (JiR score) – is simply the sum of a company’s bonus and minus points. In case of BAT, that leads to a JiR score of 13.7 bonus points.

BAT Jung in Rente score
BAT Jung in Rente score

Companies with a JiR score of less than -10 rarely make it on our watchlist, let alone our portfolio. With a JiR score of -10 or higher a stock qualifies itself for deeper analysis. A JiR score of 10 or higher is seen as a buy signal.

With a JiR score of +13.7, BAT is currently a buy candidate.

Dividends

Apart from our JiR score, I also consider a company’s dividend policy. That’s why, before every purchase, I not only check the current dividend yield but also have a look at the dividend growth rate and dividend track record as well as the payout ratio.

BAT Dividends
BAT Dividends

Up until now, BAT pursued a very investor-friendly dividend policy. The British company has increased its dividend year after year over the entire valuation period. The average annual dividend growth rate over the past 5 years was 6.7%. At present, BAT pays out about two thirds of its earnings, which is equal to a dividend yield of 6.6% considering our purchase price of €33.20.

Conclusion

Due to its stable business model as well as its investor-friendly dividend policy BAT already made it on our watchlist a few months back.

After falling sharply below its 52-week low, we decided that it’s time to add BAT’s stock to our portfolio.

Our purchase of 75 shares of BAT provides us with an additional passive income of roughly €170 per year.






What do you think about investing in tobacco stocks and BAT in particular? Please let me know and leave a short comment or contact me on Facebook or Twitter!

2 Replies to “Recent Buy: BAT”

  1. Hi,

    guter Kauf aus meiner Sicht, leider kommt aufgrund der Gebühren meines österreichischen Brokers BAT nicht in Frage. Aber mit MO und PM hab ich schon 2 gute Tabakkonzerne im Portfolio….

    lg
    Andy

    1. Hi Andy,

      besten Dank fürs Vorbeischauen! Schade, dass du in Österreich aufgrund der Kosten nicht an BAT herankommst. Aber mit Altria und Philip Morris International bist du ja auch nicht schlecht bedient!

      Ich habe stattdessen noch Japan Tobacco im Portfolio. Ist zwar meiner Erfahrung nach ein nicht ganz so verbreiteter Depotwert in der DGI-Szene, aber m.E. trotzdem nicht zu verachten.

      Viele Grüße ins Nachbarland
      – David

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