British American Tobacco (BTI), is the world's second largest quoted tobacco group, after Philip Morris (PM), and UK's largest, with a market value more than twice that of Imperial Tobacco Plc (ITYBY.PK).
Just four tobacco companies control 75 per cent of the world's cigarette market; after Philip Morris, British American Tobacco is the second-largest cigarette company by sales outside China, which is the world's largest cigarette market and closely controlled by the state-owned China National Tobacco Company.
In the United Kingdom tobacco stocks, along with pharmaceuticals, were the most resilient stocks in the crash of 2007-09. While the tobacco sector fell just 17 percent when the FTSE100 halved in value from October 2007 to March 2009, it has since more than redoubled.
Clearly, tobacco shares did what defensive stocks are supposed to do, more effectively than some other defensive sectors in the UK, such as utilities.
British American Tobacco recently released its 2011 results, and, as expected, announced an increase in dividends. But, how do these results measure up against those of Imperial Tobacco?
Imperial Tobacco
Imperial Tobacco is clearly the smaller of the two, and, therefore, perhaps lesser know to US investors. Its market capitalization of approximately £25bn ($15.8bn) compares to BAT's £61.5bn ($38.9bn).
While Imperial's Embassy, Regal, John Player and Lambert & Butler are more familiar names in the United Kingdom, where it has a 45 percent market share, its global strategic brands are Davidoff, Gauloises Blondes and West.
It also has a strong market share in Western Europe, especially in four core countries: UK, Germany, Spain and France. In addition, Imperial is slowly growing its global footprint, in particular following its acquisition of Spain's Altadis in 2007, selling into 160 markets worldwide.
Imperial's results for the year to 30 September 2011 illustrate the sector's defensive and income-generating qualities. Net revenues were up 2 percent at £6.9bn (£4.37bn), on tobacco sales that were down 1.5% by volume. Total cigarette volumes fell by 4.2pc, with fine cut tobacco volumes rising 8.7pc. This resulted in total volumes falling 2.9pc to 348.5bn "stickies equivalent."
While customers in some markets have traded down to cheaper value brands, the company managed to push through price rises in others, notably in the Asia Pacific region.
Imperial's £2.6bn ($1.65bn) operating profit comfortably financed a £1bn ($633m) return of cash to shareholders, with £0.4bn (£253m) added to its cash pile. The dividend payout was increased to a 50 percent payout ratio, and there is a share buy-back program of £0.5bn ($316m) in place.
The main issue for the company over the past few years has been its debt pile, which was caused by the purchase of Spain's Altadis in 2007. At financial year end, net debt stood at £9.3bn ($5.9bn) - a £1.5bn ($950m) fall compared with expectations of a £1bn ($633m) reduction. Net gearing was 120 percent while interest cover was over five times. This year the group has targeted a further £1bn ($633m) fall in borrowings.
The final dividend was 60 pence or 37.975¢ a share, bringing the total dividend for the year to 84.3 pence (53.35¢), a 15 percent year-on-year increase. This final payment was paid out on February 18.
British American Tobacco
In 2011, the maker of Kent, Dunhill, Lucky Strike and Pall Mall cigarettes sold 705 billion cigarettes globally, a 0.4 percent reduction on 2010.
The decline in smoking in Western Europe and North America was offset with higher prices and strong growth in several emerging and developing markets, such as Brazil, Mexico, Romania and Russia. BAT's four leading brands are marketed globally, with less reliance on Western Europe than Imperial's main brands.
Higher prices meant that while underlying global volumes fell 0.4 percent last year, revenue rose 3 percent to £14.4 billion ($9.1bn). Marlboro maker Philip Morris, the world's largest cigarette group, saw its underlying 2011 volumes rise 0.5 percent.
Despite revenue rising by 3 per cent, BAT's operating profits rose by 9% in 2011, from £4,3bn to £4,7bn, ($3bn) highlighting the company's firm grip on costs, with operating margins up by more than 2 percentage points to an enviable 35.8 per cent.
With a substantially lower net gearing than Imperial and with interest cover of nine times, it has clearly the stronger balance sheet.
BAT's diluted earnings per share rose by 11 per cent, a result which was reflected directly in an 11 per cent dividend increase. This takes the total dividend for 2011 to 126.5p (80¢), with the final payment of 88.4 pence (56¢) going ex dividend on 7 March and payable on 3 May.
BAT reconfirmed its dividend policy to pay out 65 percent of sustainable earnings as dividends. BAT's forward earnings should also be boosted by a £1.25bn ($791m) share buyback program taking place this year.
No smoke without fire
Just as its competitors, British American Tobacco has not been immune from tough economies, increases in excise tax rises and higher unemployment rates which have pushed smokers to give up or switch to cheaper - and sometimes illicit - cigarettes. This is not likely to change much for the better in due course.
A bigger threat on the horizon for the tobacco industry is the situation in Australia. All four big tobacco companies have launched legal challenges against the Australian plain packaging rules, which are due to come into effect in December 2012, in an effort to reduce smoking rates.
If won by the Australian government, and, if taken up by other countries, this would hit the tobacco companies significantly. British American Tobacco is due in court in April to contest the plain packaging rules. It will allege that preventing it from using its logos equates to trademark theft; if BAT is successful, other governments considering plain packaging rules might abandon the idea.
British American Tobacco shares have long been a favorite with income seekers and dividend re-investment investors. 2011's results will do nothing to change this, in particular as its Chairman Richard Burrows has reconfirmed the group's dividend policy of paying out 65 percent of earnings as dividends for 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
No comments:
Post a Comment