British American Tobacco: Dividend Growth May Dwindle
Deleveraging must be a priority, and with heightened menthol risk likely to linger for at least two years, we expect dividend growth to slow.
We are retaining our short-term estimates, wide economic moat rating, and GBX 4,500 fair value estimate for British American Tobacco (BTI) following the company's brief trading update before it closes the books on 2018. Management said it expects BAT to beat its full-year high-single-digit EPS growth guidance. More significant to the company's valuation, in our view, is the potential ban on menthol in the U.S., which could significantly reduce sales of the company's Newport brand.
BAT says it expects an industry decline of 3.5%, but that it will take share of around 40 basis points. While the industry decline is slightly faster than in previous years, in part due to the growth of vaping in the U.S., this is in line with our expectations. Price/mix above the 5.5% achieved last year is encouraging, however, and although it probably contributed to the volume declines, shows that price elasticity remains in the normal range.
Currency will be a headwind of around 6% in the full year. This is likely to reverse next year, however, if sterling remains at current levels. We believe BAT and the broader tobacco group would behave relatively defensively in the event of a disorderly Brexit. Low price elasticity in tobacco consumption has historically led to sales growth remaining comparatively robust during previous economic recessions.
Our estimate of net debt/EBITDA of 3.6 times may prove to be too optimistic. Management expects the ratio to be around 3.9 times at the end of the year, which could imply risk to our EPS forecast through higher interest expense. This is above previous guidance of 3.3-3.5 times. Deleveraging must be an immediate priority for BAT, and with heightened menthol risk likely to linger for at least two years, we expect dividend growth to slow to a low- to mid-single-digit rate for the foreseeable future.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Philip Gorham does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.