Tobacco companies used to be among the darlings of the stock market. With growing cash flows each and every year, they made long-term shareholders a lot of money. But that has changed in recent years.
Over the last 10 years, British American Tobacco (NYSE: BTI) — one of the largest tobacco/nicotine companies in the world — has produced a total return of negative 6%, while the S&P 500 is up 231%. This includes the robust dividend payments it distributes to shareholders every quarter.
Today, its dividend yield has risen to just under 10%. With technology stocks pushing to new all-time highs, this forgotten tobacco giant looks increasingly undervalued. Is British American Tobacco an income investor’s dream right now?
The smokeable business is declining, but cash flows are strong
British American Tobacco owns some of the longest-standing global cigarette brands. These include Dunhill, Newport, and Camel. While these brands have maintained market share within the cigarette sector for decades, the overall rate of smoking is declining around the globe, which is affecting shipment volumes. To counteract the impact of those volume declines on its financials, British American Tobacco has consistently raised the prices on packs of cigarettes.
You can see the results of that strategy in the company’s consolidated financials. British American Tobacco’s revenue is actually up 5.7% over the last five years, despite the declining use of cigarettes worldwide. Over the next five years, the company expects to generate over $50 billion in free cash flow. For a company with a market cap of just $68 billion, this shows the potential discounted valuation British American Tobacco trades at right now.
But these price hikes can’t drive cash flow forever, right? Eventually, most people are going to stop smoking cigarettes. That’s where its new technology products come in.
Growth can come from new nicotine products
Almost everyone is aware of the health harms caused by cigarette smoking. So is the executive team at British American Tobacco. That is why they have been working to build and buy…
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