Over the last five years, shares in British American Tobacco (LSE: BATS) have delivered capital gains of 80%. This easily beats the FTSE 100s return of 35% and shows that, over an extended period of time, the company has offered strong and relatively stable share price growth for its investors.
However, there could be much more to come from British American Tobacco and, crucially, it could turn out to be a much more appealing growth stock in future years. Heres why.
E-Cigarettes
Despite various attempts being made over the last 50 years to introduce smokeless tobacco products to take the place of cigarettes, it is only in the last few years that they have really taken off. Indeed, e-cigarettes have become big business and the industry is now worth over $1 billion, with more potential yet to come.
Perhaps more importantly for investors in British American Tobacco, though, is the fact that the company was a relatively early entrant to the industry. Via its Nicoventures subsidiary, British American Tobacco launched its own e-cigarette brand, Vype, over a year ago. Although sales are a small fraction of those of normal cigarettes right now, the brand is building customer loyalty and, with the financial firepower of British American Tobacco behind it, market share could increase rapidly over the medium term.
Normal Cigarettes
While e-cigarettes could stimulate the companys bottom line over the medium to long term, the sale of normal cigarettes continues to provide strong growth prospects at present. Indeed, while the wider tobacco market continues to see volumes decline due to counterfeit products and increased regulation, there remains considerable scope for pricing increases especially outside of the UK where a packet of cigarettes is relatively less expensive. This should allow British American Tobacco to increase its top and bottom lines moving forward.
Looking Ahead
As well as the industry outlook appearing to be rather favourable for British American Tobacco, it also looks like a top notch investment right now. Despite rising by 80% in five years, shares still trade at a reasonable valuation. For example, the companys price to earnings (P/E) ratio is 17 and, although this is above and beyond the FTSE 100s P/E of 13.8, it is still below other global consumer stocks such as Unilever (which has a P/E of 20) and Diageo (which has a P/E of 18.3). This highlights the upward rerating potential of British American Tobacco.
Furthermore, British American Tobacco also offer strong growth prospects, with earnings set to increase by 9% next year, for instance. This means that dividends per share should increase at a brisk pace and allow the company to bump up its current yield of 4.1% over the long run.
Therefore, with vast long term potential in e-cigarettes, the scope for increased pricing in normal cigarettes, as well as a reasonable valuation and strong income potential, British American Tobacco could prove to be a top notch long term play.
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Peter Stephensowns shares of Unilever and British American Tobacco. The Motley Fool UK owns shares in Unilever. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
