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Is British American Tobacco the Right Stock to Retire With?

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Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. Let's figure out what makes a great retirement-oriented stock, then examine whether British American Tobacco (AMEX: BTI  ) has what we're looking for.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at British American Tobacco.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $80.5 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 5 years Pass
  Free cash flow growth > 0% in at least four of past five years 5 years Pass
Stock stability Beta < 0.9 0.31 Pass
  Worst loss in past five years no greater than 20% (30.3%) Fail
Valuation Normalized P/E < 18 15.88 Pass
Dividends Current yield > 2% 4.6% Pass
  5-year dividend growth > 10% 19.4% Pass
  Streak of dividend increases >= 10 years 13 years* Pass
  Payout ratio < 75% 72.7% Pass
       
  Total score   9 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes. *As measured in British pounds.

British American does a good job of delivering the goods for retirement investors, meeting every criterion except for its 30% share loss in 2008. The tobacco industry is full of stalwart companies, and British American, which makes brands including Dunhill, Kent, Pall Mall, and Lucky Strike, has the second-largest market share in the global tobacco industry outside China, so it is no exception.

Most U.S. investors are quite familiar with the strong, growing dividends and reasonable valuations that domestic players Altria (NYSE: MO  ) and Lorillard (NYSE: LO  ) bring to the table. But with less litigious environments, foreign markets can actually be even more lucrative for tobacco companies with less risk. That was one of the motivators behind Altria's decision to spin off Philip Morris International (NYSE: PM  ) a few years ago, unlocking the value of the foreign brand while walling off U.S. liabilities inside Altria's now-smaller domestically focused entity.

Despite trailing Philip Morris in revenue and market share, no other company has a greater reach than British American. It has factories in 41 countries and serves more than 180 markets, being the dominant brand in more than 50 of those.

As a foreign company, British American Tobacco flies under the radar of many investors. But for retirees and other conservative investors looking for solid income, growth potential, and some international diversification to boot, British American should definitely go on your watch list.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Add British American Tobacco to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Philip Morris International is a Motley Fool Global Gains selection. The Fool owns shares of Altria Group, and Philip Morris International. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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Related Tickers

9/22/2014 4:02 PM
BTI $118.48 Down -0.37 -0.31%
British American T… CAPS Rating: *****
LO $59.96 Up +0.56 +0.94%
Lorillard, Inc. CAPS Rating: *****
MO $45.35 Up +0.36 +0.80%
Altria Group, Inc. CAPS Rating: ****
PM $86.05 Up +0.50 +0.58%
Philip Morris Inte… CAPS Rating: ****

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