Smoking a cigarette is still a habit that many people will not give up easily. Pall Mall, Camel and Rothmans, which are all manufactured and sold by British American Tobacco PLC (BTI, Financial), were among the top 10 most valuable tobacco brands in the world last year. These three names accounted for an aggregate value of approximately $6.5 billion according to a survey published on Statista.
In addition to these superior brands of combustible tobacco, British American Tobacco offers other well-known names in the U.S. and internationally, such as Kent, Dunhill, Lucky Strike, Newport and Natural American Spirits.
Despite British American Tobacco's commitment to reduce the impact that its business has on health, promoting reduced-risk alternative products (vapor products, tobacco heating products and modern oral nicotine pouches), combustible products remain the main source of income. Their contribution to full-year 2020 total revenue of $34.65 billion represented a 90% share, virtually unchanged from previous years, confirming resilience as substantial price increases keep up with volume reductions.
For full fiscal 2021, the tobacco giant anticipates the total revenue to grow by 5% up to approximately $36.4 billion, with adjusted EPS at $3.90 to $4 (vs. $3.75 reported in 2020) and a strong conversion ratio of more than 90% from profits to cash.
Therefore, the quarterly cash dividend, currently in the amount of 74.6 cents per common share, should be reaffirmed over the course of fiscal 2021. If reaffirmed, the payment should lead to a forward dividend yield of 7.51% vs. the industry median of 5.85% and the S&P 500’s 1.34% as of the writing of this article.
The balance sheet has $2.43 billion in cash and cash equivalents and is leveraged for about $60 billion in debt. This is expected to improve by the end of the year, as the company aims to reduce its net debt to Ebitda ratio to around 3 from the current 3.3 level.
Improvements in the profitability and financial situation of British American Tobacco PLC will likely produce positive repercussions on the stock, whose shares are trading at around $39.67 apiece following a 2.2% increase over the past year for a market capitalization of $91.03 billion.
The stock is not expensive, as the share price is trading just 9% beyond the middle point of the 52-week range of $31.60 to $41.14 and slightly above the 50-day simple moving average line.
The price-earnings ratio is 10.10 vs. the industry median of 15.43, the price-book ratio is 1.03 versus the industry median of 4.02 and the price-sales ratio is 2.51 versus the industry median of 2.56.
Thus, I believe that the company represents an attractive value opportunity at current levels. Wall Street seems to agree, as analysts have issued an average target price of $50.56 and a median recommendation rating of buy.
Disclosure: I have no position in any security mentioned in this article.
