Shareholders in British American Tobacco (LSE: BATS) have become accustomed to the market beating the share price down. Last week brought two pieces of good news which saw the British American Tobacco share price jump. But, for reasons I explain below, I’d actually be happy if the share price were to fall again in coming months.
The first item of good news was British American Tobacco’s trading statement, issued last week.
I think this underlined a number of things I find attractive about the long-term investment case for the company. For example, revenue grew at over 5%, adjusting for currency fluctuations. Given the declining demand for cigarettes in many markets I see that as a strong performance. A lot of the growth is due to the growing success of the company’s so-called next generation products. The company has added another 3.6m consumers to its next generation brands over the past year.
One way to help combat declining cigarette volumes is by increasing prices. With its portfolio of premium brands like Lucky Strike, British American Tobacco has the necessary pricing power to do this. This also helped its performance, with the company pinning its strong US performance on cigarette pricing moves among other factors.
British American Tobacco’s large global footprint and strong cashflows help it pay out a sizeable dividend. It has increased the dividend every year so far this century. Continued strength in its business performance could help support such dividend growth in future. I do see a risk, though, that bigger next generation sales could hurt company profit margins. So far, such products have not proven to be as profitable as cigarettes.
US policy moves
The other piece of news which led to the British American Tobacco share price jumping last week was tax news from the company’s key US market.
There had been a proposal to tax e-cigarettes at the same rate as cigarettes. That plan didn’t come to fruition. Analysts reckoned that such a move could hurt demand for e-cigarettes, slowing revenue growth at British American Tobacco. So the climbdown was seen as positive for the shares, which moved up.
I see a risk that such a plan will come back in future, though. Cigarette companies are a cash cow for tax-hungry governments, not just investors.
Is a growing BATS share price good news?
For many investors, share price growth in a company they own is seen as positive. As a British American Tobacco shareholder, though, I wasn’t thrilled by the company’s rally last week.
The main reason I like British American Tobacco is for its dividend income. Currently I have no plan to sell any BATS shares, but would happily buy more for my portfolio. A rising share price doesn’t affect the dividend — but it does mean that the yield falls relative to what was available before. Admittedly British American Tobacco still offers a 7.8% yield. That puts it among the ranks of the FTSE 100’s highest yielding shares.
But with a lower British American Tobacco share price, I could get an even higher yield. Even after last week’s jump, the shares are 5% below their level a year ago, at the time this was written today. I’ll be looking out for any price pullbacks in coming months to add more shares to my holdings.
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Christopher Ruane owns shares in British American Tobacco. The Motley Fool UK has recommended British American Tobacco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.