The UK’s blue-chip index, the FTSE 100 is full of companies that have a long history of producing steady returns for investors, no matter what the market environment.
However, there’s one company that’s produced a better performance than most over the years. I believe that these returns will continue for the foreseeable future, even though there’s growing pressure on the company’s business model.
Market leader
Over the past 15 years, shares in British American Tobacco (LSE: BATS) have produced an average annualised return of 16.5%. For some comparison, over the same period, the FTSE 100 has produced an average annualised total return of less than 9%.
Even though sales volumes are coming under pressure due to health concerns about smoking, through a combination of price hikes, mergers and cost-cutting, British American has grown earnings per share by 180% during the past five years. Over the same period, the firm’s dividend has increased by a similar amount.
I believe that these returns can continue for the next two-and-a-half decades. Today the company revealed its plans for its Next Generation Products. These products are designed to help offset the declines from the sales of traditional tobacco items and are a growth market for the industry.
According to management, Next Generation Products will generate as much as £500m in sales for the company this year, and £1bn next year. Revenue will rise to an estimated £5bn by 2022.
According to today’s press release on the matter, management expects the “NGP business to be breaking even by the end of 2018 and to deliver substantial profit by 2022.” The update goes on to say that British American’s glo tobacco heating device “has continued its excellent growth in Japan, already achieving a national share in a leading convenience chain of more than 1.8% in only the second week of the national rollout… In South Korea, share in handlers in Seoul has reached 3.5%, after nine weeks.“
Future growth potential
Some investors might be concerned about British American’s prospects as global sales of cigarettes decline. Today’s press release shows that shareholders shouldn’t be worried. Management appears to have a plan to rekindle growth. £5bn of NGP product sales by 2022 will be around 17% of total revenues according to my numbers.
This growth excludes any additional expansion from cigarette income. British American has proven that it can grow sales even as volumes declined over the past decade, and as long as it sticks to this strategy, I believe there could be additional income to squeeze from this division.
The bottom line
Overall, I believe it is a great stock to buy and forget for the next few decades. The company has a solid plan for future growth in place, a record of producing returns for investors and an attractive, well-covered dividend yield. The shares currently yield 3.8%, and the payout is covered 1.5 times by earnings per share.