Sterling has been losing value compared to many other currencies. Over the past year, the value of the pound against the dollar has fallen 22%. That is painful. But it is less problematic for some of the shares in my portfolio than others. Here, I explain why I would actually consider buying more of one UK stock I already own at the moment, even as the pound weakens.
Global industry giant
The UK stock in question is British American Tobacco (LSE: BATS). As the name suggests, this company makes and sells cigarettes and other tobacco products. Although it is headquartered in London, it is a truly multinational firm, with operations spanning the globe.
It has a sizeable operation in the US, where five years ago it took full control of tobacco rival Reynolds. That meant BAT gained control of strong brands in the US, such as Camel. Last year, US sales of £11.7bn represented 46% of all revenues at BAT.
The US also contributed 54% of the company’s profit from operations. In other words, not only did the US market lead BAT’s sales globally, it also contributed an outsized share of profits.
A weakening pound
What does that mean for the company in the context of a weakening pound? I think it is good news.
Imagine that US sales are roughly flat this year. That would mean over the course of 2022, the US division puts the same amount of dollars into the company’s coffers as it did last year. But as BAT reports in pounds, those dollars will be converted into pounds for reporting purposes. The pound has tumbled by 22% against the dollar over the past year. But looked at from the other side of the pond, that means the dollar has strengthened by an equivalent amount.
Meanwhile, as a lot of the US division’s costs are incurred in US dollars, they should not increase in pound terms as much as revenue does.
So I see a weakening pound as positive for BAT. It should boost the contribution to the company’s finances made by its mammoth US business.
A UK stock I bought to hold
Would that make me buy BAT for my portfolio on its own? It would not. Exchange rates are outside the company’s control. While the pound has weakened considerably, that does not necessarily mean things will continue that way.
However, I was already happy to own BAT shares in my portfolio and hold them for the long term. The company has a strong position in a highly profitable industry. Its brand portfolio gives it pricing power.
A risk I see owning any tobacco stock is the long-term decline in smoking cigarettes. But BAT actually grew its revenues last year, thanks in part to that pricing power. It has also been growing its non-cigarette business.
With its 6.4% dividend yield, I am happy to own this UK stock in my portfolio and would consider buying more of its shares. A weakening pound only adds to its appeal for me as an investor.