So the question is: should you buy this stock? Well, the company’s management is efficient and has consistently reduced costs over the past years. This has resulted in more free money, many of which has been returned to shareholders, mainly through constantly increasing dividends that currently reach a 4.75% yield. Nevertheless, concerns about growth opportunities cannot be dismissed. Having said that, I would
buy and hold
this stock at 17 times earnings, as dividends paid every 90 days allow you to reinvest your money and widen future returns while earnings should continue to grow at an 8%-12% rate over the upcoming years. This could be the ideal retirement stock ; consider it.
A stock with increasing market share
Although British American Tobacco PLC (ADR) (NYSEMKT:BTI) does not sell a cigarette brand as strong as Marlboro, its products, comprising Dunhill, Kent, Pall Mall, and Lucky Strike, among others, have been increasing its market share over the past years. With almost three-quarters of its cigarette sales coming from developing markets, the company seems poised to grow as cigarette consumption per capita is projected to rise in these areas and customers are expected to migrate to premium cigarettes, which generate higher margins. Furthermore, the firm also holds a 42% stake in Reynolds American,
the second largest cigarette company in the U.S. after Altria, and a 31% share of ITC Limited, India’s leading cigarette enterprise. This further increases the exposure of the firm to these markets.
While the company faces the same threats as its peers, namely excise tax increases
and other regulations, its diversified product portfolio and international presence – principally in Europe, Latin America, the Middle East, and Asia – should help it remain profitable while maintaining its pricing power and high margins. In spite of trading at 23.3 times earnings – the industry median is 18 – I would still consider
buying this stock, especially as the company offers a
consensus annual growth rate estimate
of about 10% over the next five years. Moreover, its 5.04% dividend yield should continue to benefit stockholders; Morningstar analysts calculate that British American Tobacco PLC (ADR) (NYSEMKT:BTI) will continue to pay out about two thirds of its adjusted net income as dividends, providing a stable source of income for investors in the years to come.
Bottom line
Although tobacco could seem like a declining industry, this is only true for the more developed countries. Contrary to this belief, emerging markets have been, and promise to continue, increasing cigarette demand. These three companies offer compelling investment prospects for long-term (especially income) investors. Within the sector, I believe that Philip Morris, through its strong product portfolio and unmatched international presence, should outperform its peers and is, therefore, the best investment choice. Nevertheless, all of these companies should provide upside and a steady source of income for investors.
The article Should Big Tobacco Have a Place in Your Portfolio? originally appeared on Fool.com is written by Victor Selva.
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