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British American Tobacco: 6.7% Dividend Yield For Now, Not Future-Proof

Published Fri, 28 Feb 2020 11:04:38 -0500 on Seeking Alpha

British American Tobacco delivered solid results for 2019, with higher volume declines offset by a higher price/mix of 9% and cost savings.
Next Generation Products revenues grew strongly, driven by Heated Tobacco in Japan; but the overall offering appears uncompetitive.
In e-vapor, it had a mixed track record in the U.S.; it has steady growth in the E.U. but only limited revenues and will soon face more competition.
In Heated Tobacco, it continues to be far behind Philip Morris in Japan, with the latter now opening a lead in new markets such as Russia.
At 3,162.5p, the company is more expensive than Altria, less well-placed in Next Generation Products and has more tail risks. Reiterate Neutral.

(We previously wrote about British American Tobacco as "Blue Sky Capital")
We review British American Tobacco (BTI) (referred here as "BAT") following 2019 results on Thursday. Including dividends, BAT shares have been roughly flat since our initial Neutral rating in December 2019.
Solid 2019 P&L
BAT delivered solid results in 2019. On an adjusted, constant currency basis, Net Revenues grew 5.6% year-on-year, Profit from Operations ("PfO") grew 6.6% and EPS grew 8.4%:
BAT Profit & Loss (2019)

Source: BAT results press release (2019).

Total volume for cigarettes and Tobacco Heated Products ("THP") declined by 4.7% for the full year, accelerating from 3.7% in H1 (implying a decline of 5.6% in H2), while price/mix rose from +7% in H1 to +9% for the full year.
PfO growth was helped by margin expanding 76 bps, with significant cost savings, including the 4% headcount reduction completed since September.
The share count was flat year-on-year as cashflow continued to be used to pay down debt, but EPS growth was helped by a lower tax rate.
Including one-offs (particularly a £252m charge from a tax audit in Russia) and currency, reported EPS was down 5.4% year-on-year. The dividend was raised 3.6%... Read more

Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
ALTRIA GROUP 44.46   13.2 3.36 3.36 7.23
PHILIP MORRIS INTERNATIONAL 74.90   14.9 5.03 4.68 6.12
IMPERIAL BRANDS 27.17   0.0 0.00 0.00 0.00


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