British American Tobacco: Let's Ask Benjamin Graham

Core Viewpoint - British American Tobacco (BTI) is evaluated through Benjamin Graham's framework for defensive stocks, indicating it is a strong investment opportunity despite challenges in the tobacco industry [3][18]. Financial Strength - BTI is classified as a large, prominent, and conservatively financed company, with debt ratings in the upper medium end of the investment grade and a stable or positive outlook [3][4]. - The company has a strong dividend record, exceeding Graham's requirement of continuous payments for over 20 years [3][8]. Growth Potential - BTI has demonstrated adequate earnings growth, with a compound annual growth rate (CAGR) of 3.0% over the past 10 years and 4.0% over the past 5 years, surpassing Graham's minimum growth requirement of 2.9% [4]. - Future growth is expected to be modest, with management anticipating a decline in global tobacco industry volumes by 3%, but low-single-digit organic sales growth driven by new product categories [4][17]. Valuation - The current market P/E ratio for BTI is 6.70x, significantly lower than the Graham P/E of 14.9x, suggesting the stock is undervalued [15][16]. - The estimated Graham number for BTI is approximately $56.6, indicating a 44% discount from its current market price [16]. Market Performance - BTI stock delivered a ~9% total return in the latest quarter, slightly outperforming the market's 8.27% rally [13]. - The stock's high yield of nearly 10% and low P/E ratio present a compelling opportunity for contrarian investors [11][19]. Industry Challenges - The tobacco industry faces declining cigarette volumes and increasing regulatory scrutiny, which could impact future growth [17]. - BTI's revenue is significantly derived from emerging markets, which may introduce volatility due to political and economic factors [17].