Is it time to realign your portfolio with a value investing strategy? What about increasing a bet on British American Tobacco PLC (BTI, Financial)?
For the 52 weeks through Sept. 10, its share price has declined 26% to $47.40, trading 17.5% below the 200-day simple moving average line and approximately 10% below the 100- and 50-SMA lines.
The current share price is almost on par with the 52-week low of $47.34 and more than 50% from the 52-week high of $71.44.
British American Tobacco has a market capitalization of $108.23 billion on the New York Stock Exchange. Following the drop in the value of the stock, the price-book ratio is 1.34 versus an industry median of 3.7,8 and the price-earnings ratio is 2.02 versus an industry median of 17.38.
The British multinational tobacco company is attracting the attention of investors not only for its modest valuation, but for a compelling combination of earnings yield and forward dividend yield.
The earnings yield is 49.5% and the forward dividend yield is 5.72%.
The first metric reflects a higher yield than the 4.45% spot rate on the 20-year high quality market (HQM) corporate bonds. The HQM corporate bonds refer to the securities representing corporate loans issued by triple-A, double-A and single-A rated companies and with a maturity of 20 years. Value investors usually seek stocks with earnings yields at least double the spot rate on 20-year HQM corporate bonds.
The forward dividend yield is based on the closing share price of Sept. 10 and on the forward annual dividend of $2.72. The forward annual dividend is the result of a cash quarterly dividend of 68 cents assumed to be kept constant for the next four quarters. The forward dividend yield of British American Tobacco is higher than the S&P 500 current yield of 1.77% and the 10-year yield on U.S. Treasury bond of 2.9%.
British American Tobacco has an important history of paying dividends to its shareholders. Even though the distribution has been erratic, the company has been paying shareholders for almost 35 years already. Therefore, the British tobacco giant is a loyal dividend payer.
British American Tobacco is headquartered in London and is the third largest publicly traded tobacco company in the world, preceded by Philip Morris International Inc. (PM) with a market capitalization of $121.84 billion and by Altria Group Inc. (MO) with a market capitalization of $114.2 billion.
British American Tobacco is a worldwide provider of cigarettes and other tobacco products. It also produces tobacco heating products and vapor, moist snuff brands and other oral products such as snus, and markets cigars and e-cigarettes.
The strategic portfolio of cigarettes includes brands: Kent, Dunhill, Lucky Strike, Pall Mall and Rothmans. These were previously known as the Global Drive Brands. British American Tobacco is a market leader in more than 50 countries, sells its products to retail stores and has operations in over 180 countries.
British American Tobacco closed full fiscal 2017 with revenue of 20.292 billion British pounds, ($27.4 billion), operating income of 6.476 billion British pounds ($8.7 billion) and net income of 37.704 British pounds ($50.87 billion). The net income includes the contribution of the businesses that British American Tobacco acquired during the year, which are Reynolds American, Bulgartabac, Winnington and Fabrika Duhana Sarajevo.
The company has grown its revenue at an average annual rate of 9.8% over the last three years versus an industry median of 4.1%. Over the last three years, British American Tobacco has seen its normalized earnings per share at an annual average rate of 122.3% versus an industry median growth rate of 9.1%.
GuruFocus has assigned a profitability & growth rating of 8 out of 10. That is concerning the past.
Regarding the future, consensus forecasts are that the revenue will grow 16.3% to $31.857 billion this year, 5% to $33.455 billion in 2019 and 3.4% to $34.584 billion in 2020. Earnings per share without non-recurring items is forecasted to be $3.33 in 2018, $3.70 in 2019 and $4.01 in 2020.
The balance sheet of the company has $3.06 billion in cash on hand and securities and total debt of $64.13 billion. The huge financial burden is not a problem for British American Tobacco for several reasons: The interest coverage ratio of 5.53 is indicating that it is not having any problem in paying the interest expense on the outstanding debt, and over 90% of the trailing 12-month free cash flow is levered. That means that the outflows for debt repayment needs is outclassed by the impressive magnitude of the cash flow that the company can generate every 12 months from its operations.
GuruFocus gives the company a financial strength of 5 out of 10.
Disclosure: I have no positions in any security mentioned in this article.
