British American Tobacco is one of the largest international tobacco companies in the world. The company was founded in London in 1902 as a result of a merger between British and American tobacco companies. Today, the company is headquartered in London and operates in more than 180 countries. Results over the past few years have been a bit scrubby, but the company continues to grow. Is its stock now at a fair price?

The company manufactures and sells a wide range of tobacco and nicotine products, including cigarettes, electronic cigarettes and heated tobacco-based products. Some of their best known brands include Dunhill, Kent, Lucky Strike, Pall Mall and Rothmans.

In recent years, the company has focused on expanding its portfolio to include 'new categories', which include less harmful alternatives to conventional cigarettes, such as vaporizers and nicotine sachets.

$BTI is also known for its strong commitment to sustainable business and responsible marketing. The company invests in innovation to develop products that could reduce the health risks associated with smoking. However, like other tobacco companies, British American Tobacco has faced criticism and regulatory challenges due to the negative health impacts of their core products. How do they deal with this in today's world?

Management

Tadeu Luiz Marroco - CEO

Prior to taking on the role of CEO, Mr Marroco was Group Transformation Director and worked with CEO Jack Bowles to further simplify the structure and processes to enable the business to accelerate the transformation.

He joined $BTIin 1992. In 2014, he joined the Board as Director of Business Development. He values his work at the company. Among other things, he characterized it with one sentence: "One of the things I still find so interesting about BAT is the diversity of the business - the many different cultures you experience, and also the many markets, each with their own challenges and opportunities."

Mr Tadeu holds a degree in electrical engineering from Universidade Federal do Rio de Janeiro. He received his MBA from COPPEAD Graduate School of Business in Brazil and also studied at ESSEC Business School in France.

He is married with two sons and loves the cultural life in London, especially going to the theatre and watching musicals. He is a big football fan and a season ticket holder at Arsenal. His son loves motor racing, especially F1.

The company's field/specialty

Traditional tobacco products: This category includes the manufacture and distribution of cigarettes, cigars and other traditional tobacco products. Some of its best known brands in this category are Dunhill, Kent, Lucky Strike, Pall Mall and Rothmans.

New (modern) categories: as part of its diversification and efforts to reduce the health risks associated with smoking , $BTI invests in the development and marketing of products in so-called new categories. These products are aimed at users seeking alternatives to cigarette smoking.

- Electronic cigarettes (e-cigarettes): These devices heat nicotine liquid to create an inhalable vapor. An example of BAT brands in this category is Vype (now Vuse).

- Heated tobacco products (heat-not-burn): This technology involves devices that heat tobacco to a lower temperature than traditional cigarettes, producing nicotine and flavor without burning the tobacco. BAT's brand in this area is glo.

-Nicotine sachets: These sachets contain nicotine and are designed to be placed between the gums and cheek. Examples of$BTI brands include VELO.

Innovation and Research: The company invests heavily in research and development to create new products and improve existing technologies. This specialization includes working with scientific and medical experts to improve the safety and efficacy of their products.

Regulatory and Responsible Marketing: British American Tobacco also specialises in ensuring that their products comply with various regulatory requirements around the world, and is committed to responsible marketing and sales of their products, particularly in terms of restricting sales to minors.

Company profitability and cash

The company is holding steady so far in 2024 after a significant drop in its share price last year. The price is moving in a sideways trend and is not moving much anywhere. Since the beginning of May, we have witnessed at least a minor recovery that has propelled the share price higher by 6.45%. But yesterday, the stock fell less than 2% after the market opened, quickly erasing some of that move.

The company's current market capitalization is $68.21 billion. This is the same value the company was at during the downturn in 2020 or 2008. It is down 58.7% from the peak at which the stock traded 7 years ago. The company now employs 52,000 people.

While it is a dividend aristocrat with a high payout and a long history that dates back to 1902, only 4,430 shares are held in private hands. The company's debt is a high $50.62 billion. The cash available to management is $6.71 billion.

In 2019, the company's revenue was at a flat $33 billion. The operating margins were at 22.05% at that time. Thus, the net profit was $7.28 billion. In 2020, revenue was up by $3 million. Margins moved up to 24.84% and net income rose to $8.21 billion. In the next year, all of these metrics were up again. Revenues were $35.36 billion and profit margin was 26.4%. This pushed the company's 2021 profit to $9.34 billion. However, in the last two years, this steady trend has reversed and the company has started to lose ground. In 2022, revenues were $34.908 billion. Margins have fallen (only slightly so far) to 23.91%. Net income has fallen to $8.15 billion. Last year was not a good year for the company. Revenues were $33.98 billion. but operating margins went into negative numbers. They were -52.73%. The company made $17.91 billion in 2023.

The company has its business spread all over the world. However, most of the revenue still comes mainly from the U.S. Last year, 43.96% of the total revenue value came from this country. That equates to $14.91 billion. Europe was next, along with South America. These continents generated $11.85 billion in revenue for the company. That's 34.95% of their total value last year. Africa and Asia are next with 20.15% or $6.83 billion. The last place is occupied by the United Kingdom. Here, the company earned $316.98 million.

Classic cigarettes still account for the largest share of sales and, for that matter, revenue. The company made $27.48 billion on these products last year. "Vaping" products added $2.25 billion (6.64%) and heated tobacco earned $1.24 billion.

Earnings per share were $3.11 in 2016. This was 0.11% above the market consensus. But a year later, EPS managed to rise to $3.96. In 2018, earnings per share were $3.95. In both of those years, the company stayed above analysts' estimates, first by 2.82% and then by 4.93%. In 2019, it fell slightly short of their outlook, but EPS jumped to $4.17. Over the past four years, earnings per share have held at a very similar level. In 2020, it was $4.6. In 2021 and 2022, it was $4.48 and $4.62. The company has stagnated like this. Last year, growth was expected and the company delivered, but not to the extent the market would have liked. EPS were $4.73. It was their highest value. By 2027, the company should continue to move higher in slow steps. By 20207, earnings per share could get to $5.53.

Revenues were "only" $18.51 billion in 2016. In 2017, they hit $27.93 billion and jumped even higher to $32.34 billion a year later. In 2018, the company managed to beat the consensus by 2.87%. In 2019, revenue was $33.25 billion, and in 2020, it increased to $35.71 billion. To date, this is the company's highest revenue value. In recent years, it's been very similar to earnings per share here. Stagnation has accompanied the company as many people quit smoking. While management is trying to compensate for this with new products, it's not that effective yet. From 2021 onwards, sales are slightly down. For 2023, they were $34.39 billion. That trend should reverse this year, and by 2027, where Wall Street's estimates are reaching so far, revenue should slowly increase. In 2027, it could reach as high as $37.49 billion.

As of 2018, the largest revenue segment, which includes combustible tobacco products, moved from $20.61 billion to $27.48 billion last year. Vaping products moved from $424 million to $2.25 billion over the same time period. Oral products such as chewing tobacco grew slightly. This group moved from $1.18 billion to $1.45 billion as of 2018. Heated tobacco and similar products then lifted their category over the same time period from $753 million to $1.24 billion.

Operating expenses

The company has maintained very good profitability for many years and management has kept an eye on costs. In the last year, however, all that rhetoric has changed. So how have costs evolved over the years?

In 2014,$BTIneeded $4.33 billion for one half of the year. The company hovered around that figure for the next two years. But in 2017, the first half of the year saw costs rise to $8.3 billion. Then in 2019, the half-year expenses climbed to over $9 billion. The company has struggled to break out of that figure. In the first part of 2020, it hasn't managed to do so yet, but in subsequent periods it will. Expenses dropped to 7.51 billion for the half in the first 6 months of 2023. But the end of last year was very costly. The company spent $35.5 billion. That put it in the red. This year, that spending is expected to come down significantly.

Dividend

But the company has been paying a dividend for a very long time. Shareholders received their first share of the company's profits back in 1977. The first dividend was worth 3 cents per share. This value has, of course, increased over the years. But its face value has fluctuated quite a bit as the company has gone through several stock splits. The first one was a 4/1 split in 1983. Since that date, the dividend has been paid unevenly. Sometimes more times per year than in the previous year.

By the end of the millennium, there were three more stock splits and the new dividend was $0.127. Until 2018, the company paid a dividend only twice a year. In recent years, however, it has moved to a more modern and more widely used quarterly payout model. The latter is now $0.733 per share. The annual dividend yield is 9.36%.

Comparison with peers

Altria $MO: Altria Group, Inc. is one of the largest and best-known tobacco companies in the world. The company was founded in 1985. It is the parent company for several major subsidiaries, including Philip Morris USA, the maker of well-known cigarette brands such as Marlboro, and John Middleton, a producer of cigars and cigarillos. In addition to tobacco products, Altria has also invested in other areas, including wine (through Ste. Michelle Wine Estates) and soft drinks. A significant part of its portfolio also includes a stake in Anheuser-Busch InBev, one of the world's largest beer producers.

Philip Morris $PM: Philip Morris International Inc is one of the largest tobacco companies in the world, best known for its globally popular cigarette brands such as Marlboro. The company was founded in 1847 in London and is headquartered in New York, USA, with its main operational headquarters located in Lausanne, Switzerland. Philip Morris International operates in many countries around the world and sells its products in more than 180 countries. The company is independent of Altria Group, Inc., which markets Philip Morris products in the US. PMI focuses on international markets and continues to expand its global footprint.

Imperial Brands $IMB.L: is a major international tobacco company headquartered in Bristol, United Kingdom. The company was founded in 1901 and originally known as Imperial Tobacco Group. In 2016, it was renamed Imperial Brands to reflect its broader focus, which includes not only tobacco products but also other consumer goods. Imperial Brands operates in more than 160 countries and owns a wide portfolio of cigarette, cigar and tobacco brands, including Davidoff, Gauloises, West and JPS (John Player Special). In addition, the company manufactures and distributes hookah tobacco and other products for nicotine users.

Blue - $BTI, Yellow - $IMB.L, Orange - $MO, Turquoise $PM

All of the companies in today's comparison have been struggling with client churn in recent years and the amount of regulation they have to work with. So far ,$PMhas been the best at handling this , up 40.94% since 2020. In second place by a fairly significant margin is $MO. This stock is up 10.81% over the last 4 years and 5 months. Shares of $IMB.L are up 10.34% since 2020. However, in last place is $BTI. The latter is currently struggling with profitability due to high costs. Its stock has been stagnating in a sideways trend for the past few years, similar to its revenue and earnings per share trends. This should hopefully change in the next few years, al it is now booking a 14.74% depreciation from 2020.

Future plans

$BTIis actively working to transform its product portfolio towards smokeless and nicotine products with lower risk. The company's goal is to generate more than 50% of its revenue from these new categories by 2030.

- Heated tobacco: The company is investing in the development and promotion of tobacco heating devices, such as glo, that heat tobacco instead of burning it. The company claims that this way of consuming tobacco is less harmful than smoking traditional cigarettes.

- Electronic cigarettes: British American Tobacco is also developing and promoting its line of electronic cigarettes under the brand name Vuse (formerly known as Vype). Vuse is one of the leading brands of electronic cigarettes on the market.

- Nicotine sachets: The company is investing in Velo brand smokeless nicotine sachets, which are particularly popular in Europe and North America.

Digitalization and innovation: BAT focuses on digitization and the use of data to improve its products and marketing strategies. The company is investing in technologies that allow it to better understand customer needs and preferences. The aim is not only to improve the customer experience, but also to optimise the supply chain and production processes.

- Reducing emissions: The goal is to achieve carbon neutrality by 2050. This includes efforts to reduce greenhouse gas emissions throughout the value chain, increasing energy efficiency and using renewable energy sources.

- Responsible use of water: The company is working to improve water efficiency at its operations and promote sustainable agricultural practices among its tobacco suppliers.

Expansion into new markets BAT is focusing on expanding its products into new markets, particularly in smokeless products. The company has identified growth potential in developing countries and is working to strengthen its presence in these markets.

Outlook

The company's stock has sold off solidly over the past year and a half. Since the start of 20203, they are now down 23.55%. This year so far, it looks like a more stable performance, but despite this, the stock is now trading at the same prices as it did in, say, 2008. For many years it has been in negative numbers in terms of profitability last year, but the future is more promising. Even though the tobacco sector is still highly regulated and moulds have to make great efforts to comply with everything. They are coming up with alternative solutions and their sectors have grown many times over in the last few years. Even though the company has a relatively high debt, it should start making money again. Currently, one share on the stock exchange is trading 17.6% below its fair intrinsic value. The next big attraction then is the significant dividend. The company has been sharing its profits with shareholders for many years and shouldn't change that anytime soon. So this is a company from which we as shareholders don't have to expect miraculous appreciation in the form of growth in nominal share value, but it is stability in the portfolio that pays a solid payout. Do you have this company in your portfolio or do you gravitate more towards one of its competitors?

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