British American Tobacco (AMEX:BTI)

British American Tobacco (LSE: BATS, AMEX: BTI), based in London, UK, is the world's third largest tobacco company, after China National Tobacco Corporation and Philip Morris International (PM). BAT owns over 300 brands including Pall Mall, Gladstone, Dunhill, Lucky Strike, Kent, Winfield, Vogue, Players, Benson & Hedges, Rothmans and Parisienne. BAT has market leadership positions in over 50 countries and operations in approximately 180 countries. BTI is part of my Smoking & Drinking Dividends strategy.

The company was established in 1902, when the Imperial Tobacco Company (UK) and the American Tobacco Company (USA) agreed to form a joint venture, British American Tobacco Ltd. BAT sells not only cigarettes, but also rolling tobacco and smokeless tobacco products ("snus").

The title offers an attractive current yield in the current climate, with 3.9%, although it is significantly lower than its average yield of 4.8%. The average annual growth, at 13%, is also attractive and higher than that of my portfolio. The payout ratio for its part, with 63.88, is within the norm and still leaves room for future dividend growth, even in the event of a difficult passage.

A small shadow on the horizon, like many tobacco manufacturers, BTI displays high volatility, with 24.9%. This increases the risk of a transaction at a bad time and can quickly tickle the emotions of many investors, which is never very good for making good decisions. It is therefore a question of venturing into it with caution and trying to keep a cool head. On the contrary, this volatility is not too influenced by the market, since the beta is only 0.6. The tobacco makers follow a rhythm of their own and this is always interesting for diversifying a portfolio. We can see this phenomenon particularly in the graph below, at the beginning of this century.

With operations in more than 180 markets, BAT is the world's most open tobacco company. The company is therefore required to conduct its operations in many different currencies. However, despite this strong international presence, BAT does not directly sell cigarettes or other tobacco products in the United States. Instead, British American Tobacco sells Pall Mall and other brands indirectly through Reynolds American (RAI), a company in which British American Tobacco owns 42% following an agreement with RJ Reynolds Tobacco Holdings, Inc. in July 2004.

BAT's international configuration makes its title particularly resistant to dollar fluctuations., a structurally weak currency (and the recent decision of the FED not to reduce its support for the economy is unlikely to change this situation). One could say a priori that an English company is not influenced by the greenback anyway, but that is to forget that BAT nevertheless exports to the United States as well as to other countries using the USD. And then the Pound Sterling is also weak and far from being independent of the American dollar.

BAT's ability to free itself from currency risk is therefore a real plus. The $risk of -0.75 even indicates that the stock tends to gain value in CHF when the dollar weakens (but the reverse is also true).

In the end, BTI wins four stars, which is a very good return/risk ratio. The stock's valuation is still attractive despite the current indecent level of the market. This is due in particular to the independence of the tobacco industry from the market as a whole. It is also due to the fact that tobacco companies are under considerable pressure in the United States and Europe at the moment, due to increasingly restrictive legislation and constantly increasing taxes. That said, this does not prevent BTI from continuing to grow its dividend, without overly prejudicing future distributions.

The stock is certainly very volatile, and may not be suitable for all investors. So be careful on this point. Nevertheless, BTI has an indisputable quality, its ability to take advantage of the weakness of the dollar (respectively of the Pound Sterling). This point is not only appreciable when investing in a foreign security, but in addition it allows to bring diversification/hedging in a portfolio clearly oriented in a structurally weak currency, like the dollar.

I plan to acquire BTI soon, to continue to diversify my portfolio, free it from currency and market risk, and, of course, receive valuable dividends 😉

Sources: Wikipedia, Wikinvest, Yahoo Finance, Swissquote, dividends.ch