Christopher Johnson: Welcome to Dividend Watch, my name is Christopher Johnson.
British American Tobacco (BATS) has recently been given a 5-star Morningstar rating by analysts for being significantly undervalued.
The British tobacco giant is currently trading at £28, severely underperforming Morningstar’s Fair Value Estimate of £39.
Backers of the company argue that its acquisition of Reynolds American has given the firm arguably the second-best position in the US cigarette market.
Meanwhile, the business generates enough revenue across continents, giving it diversification against individual countries’ regulatory risks and changes in consumer preferences.
However, BAT has faced headwinds, especially in the US, its biggest market, due to falling cigarette sales.
This drop has been driven by people switching to cheaper brands and cigarette alternatives.
The company is still betting on alternative products as a driver of growth with a target that 50% of revenues will come from products such as Vuse vaps and Glo heated tobacco devices by 2035.
However, rival Philip Morris International has a significant lead in heated tobacco which will be tricky for BAT to narrow.
In addition, the bears argue BAT’s international exposure creates significant currency risk given much of its debt is denominated in US dollars.
A strengthening of the US dollar could therefore hurt its ability to service its debt.
BAT pays a quarterly dividend worth 58p to investors.
