British American Tobacco (TBI): Smoking Dividends!

Love it or hate it, the tobacco business has been one of the greatest wealth generating enterprises in history. The popular phrase, “make it for a cent, sell it for a buck” really characterizes the economics of the industry, in which consumers are fiercely loyal and absorb prices increases in their stride. These economics make tobacco companies excellent investments, assuming the price is right.

Because tobacco companies generate huge amounts of cash and generally have little more room to expand and seldom need to upgrade property, plant and equipment, they pay out a large percentage of earnings in the form of dividends.

One such company paying out a stellar, sustainable and liberal divided is British American Tobacco (BTI). At the current price of $58.55, the company sits on a 7.46% dividend. The company is listed on the NYSE and each ADR represents two shares.

British American Tobacco (BTI) is the world’s second largest listed tobacco group by global market share, with brands sold in more than 180 markets. The company owns more than 250 brands and as a result makes the cigarette chosen by one in eight of the world’s one billion adult smokers. The company is the market leader in 50 markets worldwide, and plays in close second or third place in almost all the others. That’s a tremendous distribution system only the likes of Coca-Cola (KO) can match. The company was founded in 1902 and by 1912 became one of the largest companies in the world.

The company produces about 724 billion cigarettes through 50 cigarette factories in 41 countries, and employs more than 60,000 people worldwide.

With business economics as outlined above, it’s a real no-brainer to see that the company will continue to generate strong cash flows which in turn provide investors with a healthy divided which is unlikely to evaporate in smoke over the long-term. The company reported net income of $3.9 billion in 2009 which was 11% ahead of the prior year. However, it’s dividends that have been the star performers, up an incredible 20% per year since 2005.

The dividend is affected by exchange rate fluctuations and that is something investors need to be aware of. The company reports primarily in British pounds and declares dividends in such currency. This is a concern given the decreasing value of the pound against the dollar, but could set up the dividend for a great catalyst going forward if the pound recovers to previous levels and the dollar does not strengthen unduly against the Queen’s currency.

For those of you who refuse to buy tobacco companies based on the ethical dilemma of doing so, here’s a stat for consumption: In 2009, British American Tobacco (BTI) enabled governments worldwide to gather more than $37 billion a year in taxes, including excise duty on products, almost nine times the Group’s profit after tax.

British American Tobacco (BTI) is a solid company, with great cash flows, is well managed and has a liberal, safe and sustainable dividend. Given its exposure to emerging markets the PE of 14.90 is undemanding.

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