Past success
British American Tobacco (LSE: BATS) (NYSE: BTI.US) is one of the most successful companies in the FTSE 100. The company is a leader in its field, owns a stable of top brands and is financially strong. The company has a £67bn market capitalisation and employs around 87,000 staff worldwide.
In the last five years, BATS has increased revenues at an average rate of 8.7% a year. In that time, earnings per share (EPS) has been rising at an average rate of 13.6%. Dividend growth has been even stronger, increasing at an average rate of 15.3% a year.
Valuation
Cigarette firms have a famously reliable (addicted) customer base. This brings a high degree of visibility to their earnings.
Today, BATS shares are trading at 17.0 times last year’s earnings. With 8.5% EPS growth forecast for the year, pushing the P/E down to 15.7 times the forecast 2013 outcome.
At today’s price, last year’s dividend payout equates to a yield of 3.9%. That is forecast to increase this year, to give a prospective yield of 4.2%.
Recent results
BATS announced its results for the first six months of the year yesterday. The company reported a 7.7% increase in EPS and a 6.6% dividend hike. This is the first time since 2004 that BATS has failed to increase its dividend or EPS at a double-digit rate.
Worse still, revenues for the half-year increased by just 1.6%, while the number of cigarettes sold fell 3.2%. In the Americas, cigarette sales fell 9.9%.
My verdict
It should be noted that in the developed nations, cigarette sales are falling the most. As people have better access to the facts about the dangers of tobacco and governments impose restrictions, sales fall.
I see no sign of this trend stopping. With revenue growth minimal, dividends and earnings cannot continue to rise for much longer. Eventually, I expect that the market will start to price BATS as ex-growth. That could result in the shares being priced on a single-digit P/E.
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> David does not own shares in any of the companies mentioned. He has bet that the price of shares in British American Tobacco will fall.
