British American Tobacco (LSE: BATS) (NYSE: BTI.US) is a stock that investors seem to either love or hate.
Many, like me, love its yield and the growth potential it offers. However, others (understandably) feel that its product is so harmful that they would not even contemplate investing in it.
However, half-year results released recently highlighted to me just how much of a star performer British American Tobacco is.
For instance, despite volumes falling by 3.2% versus the first half of 2012, the company managed to increase turnover by 4% as a result of higher pricing.
Furthermore, adjusted diluted earnings per share (EPS) increased by an impressive 8%, partly due to turnover growth but also a result of efficiency improvements and considerable cost savings that are being driven through by the company.
Indeed, prospects also look bright, with the Chairman commenting that he is “confident of another year of good earnings growth”, while the CEO stated that the results evidenced “strengthening the foundations for another year of good results in line with our long-term strategic goals”.
So, with the results being positive, I’m considering buying shares in the company for the following three key reasons.
Firstly, although smoking is expensive in the UK, the aforementioned price increases may have much further to go elsewhere, where smoking remains relatively less expensive compared to average incomes than it does in the UK. In other words, the sales growth seen in the results could continue despite volumes of cigarettes sold continuing to fall.
Secondly, British American Tobacco is following, in my view, a very sound strategy. It is focused on four brands of cigarettes: Lucky Strike, Davidoff, Pall Mall and Kool, with these four hitting different customer price levels and being the main focus of sales growth.
In addition, it is aiming to cut costs further through more efficient processes, an improved supply chain and more modern machinery. Such a strategy should mean that profit growth continues in future.
Thirdly, British American Tobacco offers impressive growth prospects. EPS is forecast to grow by 6% this year and 8% next year. Although this is not extraordinary, it is nevertheless above-average and arguably is a more predictable and stable growth rate than many cyclical stocks, for example, can offer.
So, I’m keen on British American Tobacco’s strategy, its potential to increase prices and the attractive growth prospects it offers and, as a result, I’m thinking of buying some shares in the company.