I have been hunting for bargains among FTSE 100 shares and, in the process, have been considering what makes a good share for my portfolio.
One share I already own is a good example of many of the characteristics I look for when buying FTSE 100 shares for my portfolio. But does that make it the perfect share?
Proven blue-chip
That company is British American Tobacco (LSE: BATS). As its name suggests, the multinational is a tobacco manufacturer. It sells cigarettes and other tobacco products under brands such as Lucky Strike. Throughout its history it has been involved in all manner of industries, but these days its main focus is tobacco.
The company has a long history. Past performance is not a guarantee of what happens in future, but I do still pay attention to it when considering an investment. A large FTSE 100 company with a long history and proven business model like BAT has already seen a lot of water pass under many bridges.
Globally, it has operated through wars, recessions, depressions, hyperinflation and economic collapse in some markets. That sort of institutional experience is attractive to me as I think it can help a firm continue to function during uncertain times.
Strong demand and pricing power
Smoking is addictive. That means demand for tobacco products is largely unaffected by short-term economic problems. It also gives a company like BAT pricing power, meaning it can try to compensate for lower sales volumes with higher selling prices.
But while short-term economic headwinds do not damage the investment case for BAT, in my view, one risk I see is a structural long-term decline in cigarette use across most of the company’s markets. So far, it has managed to keep growing for decades despite that, through a combination of acquisitions and new product lines.
BAT has long been doing well against a backdrop of declining smoking rates. But it remains a key risk for the firm’s revenues and profits.
Growth and income prospects
A lot of FTSE 100 shares are in mature industries, so I see them more as income picks than growth choices for my portfolio. On the income front, BAT does not disappoint. Its dividend yield is over 6%. The firm has raised its dividend annually for over two decades.
But I also think it has decent growth prospects. Revenues last year actually dipped slightly. That partly reflects the currency exposure that comes with being a multinational business. But I think strong growth in non-cigarette sales as well as the potential for further acquisitions could help BAT grow in coming years.
With a price-to-earnings ratio beneath 10, I find the business attractive as well as its valuation.
Is this the perfect FTSE 100 share?
British American Tobacco is one of my biggest holdings. So is it the perfect FTSE 100 share? I do not think so. I do not think there is ever a perfect share. All shares carry risks, as shown by BAT’s heavy reliance on a product with declining demand. That is why I always diversify my portfolio across a range of companies.
However, BAT has a lot going for it, in my opinion. So I plan to hold the FTSE 100 tobacco giant in my portfolio for the foreseeable future.