Better Buy: British American Tobacco plc vs Imperial Brands plc

Both British American Tobacco plc (LON:BATS) and Imperial Brands plc (LON:IMB) have rewarded investors have rewarded shareholders with double-digit total returns over the past few years, but which stock is the better buy today?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Tobacco giants British American Tobacco (LSE: BATS) and Imperial Brands (LSE: IMB) are hugely popular stocks with dividend investors. In terms of dividend growth and capital appreciation, there have been few investments that have performed as well as these tobacco stocks over the past decade.

Both BATS and IMB have delivered similar double-digit total annualised returns over the past 5 years. Recently, however, the two have begun to diverge in terms of their performance — since the start of this year, BATS delivered a total return of 20%, topping out IMB’s 2% total return.

With that being the case, which stock is the better buy right now?

Growth prospects

BATS appears to have better long-term growth prospects. Because BATS has a much larger presence in emerging markets (particularly in Latin America, where it controls more than half of the market) and in so-called next generation products, including e-cigarettes and other vaping products, revenues are forecast to grow faster for BATS than it is for IMB.

Although earnings growth for both companies have been quite similar in recent years, their respective volume growth figures tell a different story. Cigarette volumes have grown by 2.2% year-to-date for BATS, whereas volumes declined 3.0% for IMB for the 12 months ending 30 September 2016.

Thus, it appears that IMB has only been able to maintain earnings growth through raising prices and controlling costs to mitigate margin pressures. This has worked well so far, but the prospects of such strategy delivering robust gains in the longer run is not as promising. Going forward, I expect BATS’s earnings growth rate to outperform IMB’s.

Value or growth?

However, their different growth outlooks are very much reflected by their valuation differences. Imperial shares trade at much lower valuation multiples on its expected earnings over the next two years.

Shares in IMB trade at 12.5 times its expected 2016 earnings, whereas shares in BATS trade at 17.0 times. For 2017, there is a similar picture – IMB trades at 11.8 times its expected earnings, compared to 16.0 times for BATS. The gap in their respective dividend yields is just as significant — IMB shares currently yield 4.2%, compared to BATS’ 3.4%.

However, I think BATS has more dividend growth potential than Imperial. BATS has historically had much faster dividend growth rates in the past, and with long-term earnings growth expected to be faster for the company, BATS’ dividend growth is expected to diverge more significantly in the future. In addition, BATS is set to benefit more substantially from the weaker pound, because more than 80% of its earnings come from outside the UK.

Bottom line

Which stock is the better buy for you ultimately depends on whether you’re looking for a higher current yield or if you’re searching for better long-term growth.

While IMB’s growth outlook doesn’t seem quite as impressive as BATS’, Imperial’s stock offers much better value. And as I’m a value investor, I’ll probably go for IMB right now. But if BATS share price were to pull back under 4,000p, I may have to think again.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Imperial Brands. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »