Results from British American Tobacco (LSE: BATS) (NYSE: BTI.US) are showing something of a trend — falling global consumption of the noxious vegetation, but rising profits.
That’s because of a transition away from selling increasing volumes of low-margin products to poor people and towards selling higher-margin upmarket brands to the increasingly affluent markets of the world.
Last year
Final results for 2013 illustrated the change well. Cigarette volumes fell 2.7% to 676 billion with total tobacco volumes down 2.6%, and revenue was flat — but adjusted earnings per share (EPS) gained 6% at actual exchange rates and 10% at constant rates, and the company was able to boost its dividend by 6%.
We also heard that sales volumes of the firm’s Global Drive brands, that is those upmarket brands that generate more profit, grew by 1.9%. And so much cash was generated that £1.5bn was invested in buying back 44 million shares.
And that was an extension of the previous year — 2012 saw a 1.6% fall in volumes, a 7% rise in adjusted EPS, a 7% hike to the dividend, a 3% growth in Global Drive volumes, and 38.9 million shares bought back for £1.25bn.
First quarter
The last we heard from British American Tobacco was in April, in the from of a first-quarter update. Headlined “On Track For Another Good Year“, the report repeated the familiar story — total tobacco volumes down 1.1%, but Global Drive brand volumes up 6.3%!
Chief executive Nicandro Durante was moved to say “I remain confident of delivering consistent growth in earnings in constant currency terms, which we will recognise with an increase in the dividend“.
We are, then, all set up for this year’s first-half figures, which should be with us on Wednesday 30 July.
It might be slightly surprising that analysts are predicting a 2% fall in EPS for the full year, but the company is being hit by currency movements and a strong pound at the moment — revenue was actually down 12% at Q1 time at current exchange rates, but up 2% at constant rates.
Rising dividends
And the pundits are expecting a 2.8% rise in the dividend this year, to yield 4.1% on a share price of 3,524p.
The shares are on a forward P/E of 16.5, but with EPS expected to recover next year it would drop to around 15 — that’s only slightly above the FTSE 100’s average of 14, but British American’s dividend yield is significantly ahead of the index average.