Stock of the day 24/02/2015 – British American Tobacco PLC

Big Tobacco is still Big Business, and after a solid year on the markets in 2014, the full extent of British American Tobacco’s success will be assessed once it announces its full year earnings release on Thursday.

BAT is the parent company of some of the most recognisable cigarette brands in the world, including Dunhill, Lucky Strike, Pall Mall, Kool and Benson and Hedges. After years and years of big gains 2013 saw the stock crest and fall as it entered 2014. After starting last year at £32.46, BAT fell to £28.78 by the end of January, lower than its 2013 start price. However, this was to be its nadir; from this point onwards the stock posted steady gains that saw it reach £35.83 by May, stabilising around this figure from spring to autumn.



The tobacco company couldn’t completely avoid the mid-October market slump, but quickly recovered and by the end of November had reached its year high of £38.07. The bearish sentiment that crept into the markets in the middle of December ate at these gains, sending it back to the low £30s support level, entering 2015 at £35.05. However, the stock’s strength prevailed and by the end of January was at similar levels to its 2014 high; despite a February wobble is now back at £37.51.

The impetus for this surge in the past few days has been due to rumours circulating that BAT intends to make an attempt at a $3.5 billion buyout of Souza Cruz SA. Souza is Brazil’s largest cigarette company, a company that BAT owns 75.3% of already. This bid would involve BAT buying the remaining 24.7% of the Brazilian company. Yet the plan still needs to be approved by the board and some formal securities laws in Brazil, whilst BAT continues to try and secure a credit line from a major UK lender. Regardless of the embryonic nature of the deal, investors were pleased by the potential move, and with BAT’s shares rising over 2% since the start of the week.

Tobacco stocks have traditionally been a safe haven for investors, and a key part of many a portfolio. However, there are some looming problems facing the sector. Ever-increasing calls for regulatory changes combined with a consistently growing awareness of the health concerns linked to smoking are two battles the industry may not be able to win. Normally a Western problem, even the lucrative developing world market has begun to try and introduce new regulations, and the tobacco companies will only be able to hold the tide of change at bay with their wealth and influence for so long.

Yet, for now, things still look positive for British American Tobacco. The company is on track for a compound annual growth rate in its dividend of 6% in 4 years, with a 2015 forecast P/E of 16.8 and a prospective yield of 4.2%. Analysts have given a consensus rating of ‘hold, and a target price of £36.73 for BAT, but this could change if the full year statement on Thursday sheds any more light on the Souza buyout rumours.