Amid several headwinds, such as rising health awareness among individuals, stringent government regulations, and higher taxes, tobacco usage has declined over the years. However, low-risk products introduced by tobacco companies could bode well for the industry owing to their widespread acceptance.
Given this backdrop, let us explore tobacco stock British American Tobacco p.l.c. (BTI), that might be a wise choice for investors for the reasons mentioned throughout the article.
Wide acceptance of newer tobacco products, such as vaporizers, e-cigarettes, flavored cigarettes, and other reduced-risk products, boosted the prospects of the tobacco industry. Moreover, the fact that tobacco companies enjoy the status of consumer defensives helps them withstand economic downturns.
The global tobacco market is projected to expand at a CAGR of 2.6% to reach $1.10 trillion by 2030. Against this backdrop, high-quality tobacco stock BTI should stand to benefit.
Headquartered in London, the United Kingdom, BTI is a multi-category consumer goods company that provides tobacco and nicotine products. It invests in building a portfolio of tobacco and nicotine products alongside its traditional tobacco business, including vapor, tobacco heating, and modern oral products.
On 9 February, BTI’s board declared an interim dividend of 230.9p per ordinary share of 25p, payable in four equal quarterly installments of 57.72p per ordinary share in May, August, and November 2023, and February 2024.
BTI’s forward annual dividend of $2.66 translates into a 7.98% yield on prevailing prices. This compares to its four-year average yield of 7.18%. The company’s dividend payouts have grown at a marginal CAGR over the past three years.
The stock declined 2.4% over the past six months and marginally intraday to close its last trading session at $35.12. Wall Street analysts expect the stock to reach $57.34 in the upcoming 12 months, indicating a potential upside of 63.3%.
Here are the factors that could influence BTI’s performance in the upcoming months:
Solid Financials
BTI’s adjusted revenue came in at £27.65 billion ($34.08 billion) for the year that ended December 31, 2022, up 7.7% year-over-year. Its adjusted profit from operations was £12.41 billion ($15.29 billion), up 11.3% year-over-year. Its adjusted EBITDA increased 11.2% from the year-ago value to £13.21 billion ($16.27 billion).
Its adjusted profit attributable to shareholders was £8.42 billion ($10.37 billion), up 11.4% year-over-year, while its adjusted earnings per share came in at 371.40p, up 12.9% year-over-year.
Optimistic Analyst Estimates
Analysts expect BTI’s revenue for the fiscal year ending December 2023 to increase 3.9% year-over-year to $34.81 billion. Its EPS is expected to come at $3.81 for the same period. Likewise, for the fiscal year ending December 2024, BTI’s revenue and EPS are expected to increase 4.7% and 4.5% year-over-year to $36.42 billion and $3.98, respectively.
Robust Profitability
In terms of trailing-12-month gross profit margin and net income margin, BTI’s 82.63% and 24.10% are 162.7% and 595.3% higher than the industry averages of 31.46% and 3.47%, respectively. Also, its trailing-12-month levered FCF margin and EBITDA margin of 24.08% and 44.09% are 807.1% and 311.4% higher than the industry averages of 2.65% and 10.72%, respectively.
POWR Ratings Reflect Promising Prospects
BTI’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Our proprietary rating system also evaluates each stock based on eight distinct categories. It has an A grade for Sentiment, in sync with the optimistic analyst estimates.
It has a B grade for Stability, consistent with its five-year beta of 0.34. Also, its robust profitability justifies the B grade for Quality.
It is ranked first in the nine-stock A-rated Tobacco industry.
Click here to see the other ratings of BTI for Growth, Value, and Momentum.
View all the top stocks in the Tobacco industry here.
Bottom Line
In addition to the numerous tailwinds driving the demand for tobacco, BTI’s strong fundamentals keep it well-positioned in the upcoming quarters. On top of it, amid current market volatility, the inelastic nature of the tobacco sector could benefit the stock. Moreover, its high-yielding dividend ensures a stable passive income to its valued investors.
How Does British American Tobacco p.l.c. (BTI) Stack up Against Its Peers?
While BTI has an overall POWR Rating of A, one might want to consider looking at its industry peers, Vector Group Ltd. (VGR), Japan Tobacco Inc. ADR (JAPAY), and Altria Group, Inc. (MO), which have an overall B (Buy) rating.
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BTI shares were trading at $35.29 per share on Thursday morning, up $0.17 (+0.48%). Year-to-date, BTI has declined -10.00%, versus a 6.07% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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