BAT(BTI) Seeking Alpha·2024-07-30 19:45Core Viewpoint - The market is underestimating the upside potential of British American Tobacco (BTI), particularly regarding traditional cigarettes and the total shareholder yield, which includes dividends, share repurchases, and debt paydowns [2][6][14]. Financial Performance - BTI reported total revenue of £12.34 billion for Q2, with organic revenue stabilizing at a decline of 0.8% year-over-year. Diluted earnings per share were 200.30p, reflecting an annual growth rate of 13.8% [6]. - The company anticipates low-single-digit revenue growth overall and double-digit growth in new categories, indicating a positive outlook [6]. Market Reaction - Following the Q2 earnings report, BTI's stock experienced an 11.4% price rally, contrasting with a ~2% correction in the overall market, reinforcing its defensive stock appeal [6][4]. - The market's excitement over new category growth is acknowledged, but there is a belief that traditional cigarette potential is being overlooked [7]. Valuation Insights - BTI's stock valuation is significantly discounted compared to the Graham P/E ratio, suggesting a potential undervaluation [4]. - The Consumer Price Index for tobacco has risen from ~900 in 2014 to 1,541, indicating a 5.52% annual increase, which offsets the decline in cigarette volume [12]. Dividend and Total Shareholder Yield - BTI declared a quarterly dividend of 58.88p per share, leading to an annualized dividend yield of approximately 8.4% [13]. - The total shareholder yield (TSY), which includes dividends, share repurchases, and debt paydowns, is significantly higher than the dividend yield alone, indicating greater return potential [14][22]. Share Repurchase and Debt Reduction - BTI has aggressively repurchased shares since 2022, with a net common buyback yield peaking at around 3.4% in 2023 [15]. - The company's long-term debt has decreased from 46 billion, a reduction of about $10 billion, enhancing its attractiveness to long-term investors [22].