Saturday 24 March 2018

BAT still smoking hot despite challenges

THE Bible warns us about the wages of sin. Happily, it does not say much about the dividends of "sin shares", as the stock market knows them.

Sin used to be a hot item on the market, and still is if the accepted definition is drink, gambling and tobacco. Already in this column we have explored the dividend potential of the makers of strong liquor and of online gambling. The share we are examining this week makes its millions from the demon weed, tobacco.

British American Tobacco (BAT) is one of four companies that dominate the industry around the world, the others being Imperial Tobacco, Japan Tobacco and Philip Morris International. Between them they hold 45pc of the global market. The Chinese market (which is under state control) is the largest tobacco market in the world, with 350 million smokers.

Many doctors argue that the tobacco industry is slowly killing off its customers, and for that reason the business does not have a future.

Despite the warnings, there is still a big market, albeit a diminishing one, in Europe and the US.

BAT, which once had a strong manufacturing presence in Dublin, is one of the top 10 companies on the London Exchange. Operating in 150 countries, it has revenues of £16bn (€19bn), profits of £5.4bn, 55,000 employees, 44 factories and is valued at £68bn. Its chairman is former Irish Distillers boss and one-time senior Pernod Ricard executive Richard Burrows.

BAT is just over 100 years old, starting as a trade carve-up between Imperial Tobacco of the UK and American Tobacco in a bid to end a bitter trade war. As a result, it was agreed that they would not compete in each other's domestic market. By the mid-1950s, BAT was ranked the third-biggest tobacco company in the world.

Responding to the notion that tobacco was always going to get a bad press, BAT was bitten by the conglomerate bug in the last quarter of the 20th Century. It expanded into other markets such as retail and financial services. At one time, retail interests included Saks of Fifth Avenue and Argus.

By 1989, BAT was the biggest UK insurer, having mopped up Eagle Star, Dunbar and others. After an attempted hostile takeover in 1989, the company decided to concentrate on its core business – tobacco – a trend that was helped by the fall of the Soviet Union and the acquisition of some of its tobacco monopolies. It also took over Rothmans at the turn of the millennium.

The company is organised on a geographical basis, with the biggest sales volumes coming from the Asia-Pacific region. It also has some strong brands, giving it market leadership in some 60 countries. Pall Mall is BAT's number-one brand, selling 83 billion cigarettes in 110 markets worldwide. Dunhill sells into more markets but with fewer sales than Pall Mall, at 49 billion. Kent sales are second to Pall Mall, selling 67 billion into 20 fewer markets. Lucky Strike has 33 billion sales.

BAT faces a number of problems, not least of which is the medical arguments. It also has a problem with smuggling. In Ireland alone, 10pc of cigarettes sold are smuggled. A second problem is the EU plan to ban menthol cigarettes. Finally, there is concern that plain packaging laws will spread. As a result, there is an urgent need by companies like BAT to develop new products. It recently bought CN Creative, a specialist in electronic cigarette technology.

BAT has a price-to-earnings ratio of 20 and a share price of £32.50. A share buy-back programme last year costing £1.25bn is planned to continue this year, at a cost of £1.5bn. The company continues to deliver solid results. But volume continues to decline and a changing regulatory climate poses long-term difficulty. The company is bullish in relation to e-cigs. However, BAT remains a high-quality share, which in the medium term should deliver low double-digit returns. The longer term is debatable.

Dr John Lynch is a former chairman of CIE. Nothing published in this section should be taken as a recommendation, either implicit or explicit, to buy or sell any of the shares.

Irish Independent

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