British American Tobacco: struggling to find a place in portfolios
What hurts BAT is not just the comparison to peers but the surge of money into ESG funds
Cigarette packets in many countries carry health warnings. British American Tobacco’s shares have their own in the form of an ultra-low valuation. Despite efforts to shift away from smoke-producing products, BAT still relies on 140m smokers for the bulk of its income. Meanwhile, the trend for sustainable investment is steadily filtering out buyers of tobacco stock.
Even an outlook upgrade published on Tuesday added little light. Sales forecasts were lifted to the top of the previous 3 per cent to 5 per cent growth range, though earnings per share was not revised. A substantial pick-up in reported customers for non-combustible products helped, primarily vaping and tobacco heating devices. Unfortunately, new products made up just 5 per cent of sales last year. Both Philip Morris and Japan Tobacco have more. BAT trades near a decade low on a forward price to earnings multiple of just over 8 times, fully a quarter cheaper than global peers.
What hurts BAT is not just the comparison to peers but the surge of money into environmental, social and governance funds, for which it does not qualify. A consensus earnings growth rate of mid-single digits and little hope of a quick end to cigarette dependence means the tobacco group will struggle to get attention, argues Jefferies. A new controversy over the sale of menthol cigarettes, which face a ban in the US, makes things worse. BAT controls top US brand Newport.
Vultures are beginning to circle. Kenneth Dart, backed by a fortune made from polystyrene cups, has no qualms about picking up some cheap butts. He snapped up a 6.6 per cent stake in BAT and about half that in rival Imperial Brands in late April. He may have been lured by BAT’s dividend yield of 7 per cent. No wonder. Among about 40,000 listed companies in North America and Europe, Lex could find only about 50 which offer BAT’s combination of value and income, using Bloomberg data.
For patient investors, BAT’s low price may strike a spark. But most portfolio managers will find it a tough holding to defend.