British American Tobacco (BTI) belongs to a group of stocks called sin stocks. Sin stocks are stocks of companies that many people believe promote sins – tobacco, alcohol, gambling, etc. Good or bad, they are often profitable companies and can make decent returns for their investors. My thought is that the investor can use their profits to make the world a better place if that is what they want to do.
BTI is a tobacco company based in the United Kingdom. They produce tobacco and nicotine products including combustible cigarettes, snuff and snus, and also vaping products. Their brands include Pall Mall, Lucky Strike, Camel, Newport, Vuse, glo, and many others. BTI sells its products around the world and was founded in 1902.
BTI is near its 52-week low of $35.47 which happened last September. It reached a 52-week high of $45.28 in May of 2022. Part of the reason for the low stock price is that the company receives its revenues in British pounds. Right now, with a strong dollar, it doesn’t take as many dollars to make a pound, so when converted to dollars the revenue and profits are less than normal just because of the exchange rate. With a more normal exchange rate, that alone should increase BTI’s stock price all things being equal.
One of the attractions for investors to BTI is the dividend. BTI is known for a steady high dividend payout. The stock yields 7.44% while paying out about 73% of its earnings. The dividend has grown about 5% over the last 5 years which is not great, however it is starting at a high yield so that helps compensate for the low growth rate. This dividend yield is higher than many of its competitors. Philip Morris pays out a 5.2% yield, Vector Group pays out 6.67% and Imperial Brands pays out 7.21%. Altria Group (Marlboro cigarettes) pays out 8.07%.
BTI’s price earnings ratio is 10.63% which is significantly less than the competitors listed above. This is down some from last year, and about equal to 2021. This indicates the stock is becoming cheaper by either the price coming down or the earnings going up. A lower P/E ratio is usually better.
BTI has moved heavily into the vaping products over the last several years. Smoking has come under political and social pressure in the United States and other developed countries, so the vaping has risen as a less harmful replacement. Smoking is still popular in less developed countries and most likely will not go away for a very long time. The vaping products will allow BTI to continuing selling products where smoking is frowned upon. While the volume of cigarettes sold has decreased, the tobacco companies can raise the price by a wide margin before it affects the amount of cigarettes sold. People will still pay for cigarettes even at inflated prices. This helps keep the profits steady/rising for these companies. Also as the pressure wins out to reduce smoking, the vaping products are gaining more sales.
Yahoo Finance has a $53.57 price target for British American Tobacco while Market Watch has a $57.34 target. With a prospective 33% rise in the stock price, a 7.44% dividend yield, and sooner or later a weaker dollar, I think BTI makes a good investment in this range.
As always do your own due diligence before investing. Full disclosure, I do own shares of British American Tobacco. Sources include Schwab, Yahoo Finance, Seeking Alpha and Market Watch.
(Intentional Investing is a weekly column written by Kyle Smith from Floyd County, TX, based upon his investment knowledge and does not represent the views or opinions of the Floyd County Record.)
