British American Tobacco: Enjoy The Dividends But Don't Expect Much Growth

Core Viewpoint - British American Tobacco (BTI) is facing challenges in its traditional cigarette business due to declining volumes, but it is experiencing strong growth in its new generation products (NGP) segment, which may provide future opportunities for profitability [1][6][13] Industry Overview - The tobacco industry is highly regulated, with significant risks such as the proposed ban on menthol cigarettes in the US, which could impact BTI's profits as over 20% of its US profits come from menthol products [7] - The proliferation of illegal vapes in the US market poses a challenge, taking up to 60% of the vape market, but regulatory enforcement against these products could create opportunities for compliant players like BTI [7] Earnings and Growth Drivers - BTI has warned of lower revenues in the first half of 2024 due to continued declines in cigarette volumes and the rise of illegal vapes [2] - Despite volume declines, BTI has managed to increase its volume share, indicating effective market share maintenance [2] - Analysts suggest that BTI may still have room for price increases in the US market to offset volume declines, with a current pack price of $9 compared to $26 in higher tax countries [2] - The company has seen profitability in its NGP segment two years ahead of target, with expectations for further profitability growth as economies of scale are realized [6] Dividend Information - BTI currently offers a dividend yield of over 9.5%, the highest among major tobacco players, with a 5-year dividend growth rate of just under 3% [8][9] - The strong cash flows at BTI suggest that the dividend is unlikely to be reduced in the near term, although significant growth in dividends may be limited due to the decline in traditional cigarette sales [9] Valuation - BTI is trading at a forward P/E ratio of just under 6.6, the lowest among major tobacco players and approximately 20% below its 5-year average [10][12] - The lower valuation may be justified by regulatory uncertainties and declines in traditional cigarette volumes, but growth potential in NGPs could improve valuation multiples [12] Conclusion - Despite uncertainties in the tobacco industry and declining traditional cigarette volumes, BTI presents an attractive investment opportunity due to its growth in NGPs, potential regulatory benefits, attractive valuation, and substantial dividend yield [13]