As we head further out of recession, I’m pretty bullish about most of our top FTSE 100 shares — but not all of them! Today I’m taking a look at one that is increasingly becoming victim to changing social values, British American Tobacco (LSE: BATS) (NYSE: BTI.US).
Here’s a look at some figures from the past five years, together with the latest consensus forecasts for this year and next:
| Dec | Pre-tax | EPS | Change | Dividend | Change | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2008 | £3,684m | 129.6p | +19% | 83.7p | 4.6% | 1.5x | |
| 2009 | £4,080m | 153.8p | +19% | 99.5p | +19% | 4.9% | 1.5x |
| 2010 | £4,388m | 176.7p | +15% | 114.2p | +15% | 4.6% | 1.5x |
| 2011 | £4,931m | 195.8p | +11% | 126.5p | +11% | 4.1% | 1.5x |
| 2012 | £5,648m | 208.6p | +6% | 134.9p | +7% | 4.3% | 1.5x |
| 2013(f) | £4,107m | 217.7p | +4% | 142.1p | +5% | 4.4% | 1.5x |
| 2014(f) | £4,300m | 227.7p | +5% | 148.9p | +4% | 4.7% | 1.5x |
The trend is your enemy
Now, there aren’t many companies with such strong earnings and dividend records that I’d think badly of, but the trend here is pretty much unmissable. Earnings growth is falling, and with that consistent dividend cover of 1.5 times, dividend growth is slowing at the same rate.
The yield is holding, for now, but that’s partly due to a stagnating share price. It’s unmoved over the past 12 months, slumping back in the second half after a decent start to the year, and the trend that has seen the price steadily outstrip the FTSE year after year could well be at an end.
If we look at British American’s last few sets of figures, the reason is clear. Earnings are still growing, and the company likes to tell us how well it’s achieving that by focusing on what it calls its “Global Drive Brands” — Dunhill, Kent, Lucky Strike and Pall Mall, all of which command high margins.
But the underlying truth is that tobacco volumes are falling.
People are puffing less
Full-year results for the year to December 2012 revealed a 1.6% fall in actual volumes, by the halfway stage in 2013 volumes were down 3.2%, and the firm’s Q3 update to September told of total volumes down 3%. Gone are the days of growing demand for the noxious weed in developing countries, as governments around the world increasingly strive to wean their citizens off the stuff.
British American Tobacco shares, trading around the 3,200p mark, are on a P/E of just under 15 based on a current analysts’ consensus for 2013 results. If earnings and dividend growth could stick at around 4% per year, I think that would still be a fair valuation — after all, a reliable yield of around 4.5% is an attractive proposition.
But I just can’t see those Global Drive Brands compensating for the global fall in sales volumes in the long term, and I think it’s looking increasingly likely that historians of the future will look back on these days as the time the world finally started to turn its back on tobacco.
Overvalued
On current valuations, I just think the shares are too expensive for a business that’s started on the long slide downwards — and I can’t see 2014 being a good year for British American Tobacco shareholders.
Verdict: Kick the habit in 2014!
