Is British American Tobacco a Buy?

LONDON -- Cigarette and tobacco stocks have traditionally provided safe havens in times of macroeconomic stress, and I reckon quality defensive British American Tobacco  (LSE: BATS  ) (NYSEMKT: BTI  ) can tread higher, boosted by its rising global presence.

Solid brands deliver stellar growth
BAT has excellent pricing power, which it delivers through its four flagship brands -- Lucky Strike, Dunhill, Pall Mall, and Kent -- and therefore has an enviable ability of being able to raise prices despite the current pressure on consumers' wallets. The company noted within October's third-quarter statement that sales volumes of its "Global Drive Brands" rose 3% during the first nine months of 2012.

According to the current broker consensus, earnings per share are projected to leap 9% year on year for December 2013, to 206.5 pence, before hitting double digits again in 2014, when a 10% rise to 224.5 pence is expected.

BAT does not come cheap, trading at a P/E ratio of 14.5 for 2013, but its reputation as a dependable deliverer of earnings growth despite sticky financial backdrops -- the company continued to post strong earnings growth even through the 2008/2009 banking crash -- makes it an attractive pick for me.

Developing markets set to ignite
BAT continues to build its presence in key developing geographies, and the company now boasts a truly pan-global business. On top of its traditional operations in the USA and Europe, BAT is rapidly accelerating in regions such as Brazil, Russia, Indonesia, and South Korea.

Around four-fifths of worldwide cigarette demand originates from emerging markets, and operators such as BAT should benefit from rising incomes through their enviable pricing power.

A juicy income play
BAT is a solid pick for income investors, where its progressive dividend -- which is expected to rise to 145.9 pence per share during 2013 from an expected 134.2 pence for 2012 -- continues to deliver meaty payouts for stakeholders. Analysts predict a tasty yield of 4.6% for December 2013, rising to 5.1% for 2014.

Packaging concerns just a smokescreen
Fears over the widespread introduction of new legislation covering cigarette and tobacco packaging -- after Australia introduced plain packaging in December in addition to pictorial health warnings -- has dented enthusiasm for tobacco stocks in recent months, amid concerns of falling cigarette consumption.

However, a recent study by Goldman Sachs reveals that such concerns may have been overplayed, with packaging changes in certain markets having a negligible effect on overall cigarette consumption. Consequently BAT appears severely undervalued at current levels, and I therefore believe the shares are a "buy."

Smokin' stocks
BAT has proved itself to be a great defensive stock over the years, but it isn't the only attractive cigarette manufacturer available to investors.

In addition to BAT, ace fund manager Neil Woodward of Invesco Perpetual has identified two other top tobacco specialists on both sides of the Atlantic set to provide juicy returns -- as well as a selection of other top picks across other sectors -- in a special report compiled by Motley Fool analysts. Click here to download the report -- it's free and comes with no further obligation!


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