Today I am looking at why I believe British American Tobacco (LSE: BATS) (NYSE: BTI.US) is set to deliver spectacular stakeholder returns.
A predictable growth pick
The tobacco sector has long been a favoured place for investors seeking solid earnings prospects — after all, the nature of cigarette demand makes it easier to predict long-term revenue flows. Indeed, British American Tobacco has seen earnings rise at a compound annual growth rate of 12.6% from 2008 to 2012.
The threat of waning tobacco demand continues to plague the industry, however, as the impact of escalating health worries, tightened consumer pursestrings and a growing ‘black market’ weighs. Still, British American Tobacco is expected to keep earnings moving steadily higher — broker Investec predicts a 5.1% expansion for 2013. And growth is anticipated to edge to 5.2% this year before rattling 11.2% higher in 2015.
Bonnie brands underpin perky growth prospects
Indeed, British American Tobacco can rely on cantering population rates and disposable incomes in emerging regions to deliver escalating earnings in coming years, what with the lion’s share of the world’s puffers located in these geographies.
The company’s industry-leading Growth Brands, encompassing the likes of Dunhill, Lucky Strike and Kent, continue to pull up trees in these geographies — volumes of these key labels rose 1.9% during January-September in the company’s Top 40 markets. And although certain regional issues and currency weakness in some developing markets have hampered revenues in recent times, I still expect long-term structural changes in these geographies to facilitate robust growth.
Combined with this, British American Tobacco is gearing up for the launch of its Vype e-cigarette later this year, a move underpinned by a multi-million-pound advertising campaign launched in recent weeks. Rapid growth in this red-hot sub-sector is expected to have pushed total e-cig sales of $500m in 2012 to above $1bn last year, according to Wells Fargo.
An exceptional income selection
British American Tobacco’s bubbly earnings expectations have allowed the firm to continue building the dividend, the business electing to hike the interim dividend 7% to 45p per share back in July.
Investec expects the full-year dividend to rise by the same percentage to 141.3p for the whole year, with a further hefty advance pencilled in for this year to 148.6p. And the payout is expected to surge more than 11% next year, to 165.2p, in line with vastly-improved earnings growth.
Figures for this year and next result in meaty yields of 4.7% and 5.2% correspondingly, smashing the FTSE 100 forward average of 3.2%.
On top of this, investors can also bank on the firm’s lucrative share repurchase programme to electrify returns, British American Tobacco having committed £1.5bn in buybacks in the current year alone. I fully expect the company to keep repurchases running well into the future in line with its rosy profits outlook.