There’s a price for almost every (profitable) businesses where the valuation is so low that almost nothing needs to go right for the stock to generate attractive returns. After following the company for years, at ~6x earnings and a 10% dividend yield, British American Tobacco (BTI) appears to have crossed that threshold and is now “too cheap to ignore”.
Thanks Dan. Nice write up. Do you have any idea if illicit vapes have loyalty like cigarettes have? My understanding is that at least some of the time, the vape "juice" can be used with a variety of consumption devices.
My problem is with the 20% FCF yield, what happens when revenue and FCF decline? If FCF doesn't decline in the long term due to the new categories and/or price offsetting volume drop, it's a nobrainer.
Otherweise you have to reduce debt to maintain the same leverage (debt/FCF). But when you constantly have to reduce debt, FCF available for distribution declines even further, with a double pace depending on the leverage. So if I'm correct, you have to deduct not only the rate of decline from the FCF yield, but more, to get to the shareholder return?
Good write-up, one question though - where do you get the market cap of $51b from? Market cap appears to be ~$68b. Wondering if you may have accidentally used the GBP market cap (but used the USD FCF to conclude a P/FCF of 5)?
A very sensible perspective, Dan. I appreciate the shoutout toward Invariant. If you'd ever like to talk specifics of BAT or other industry names, never hesitate to reach out.
Excellent writing, thanks for the insight.
Thanks Dan. Nice write up. Do you have any idea if illicit vapes have loyalty like cigarettes have? My understanding is that at least some of the time, the vape "juice" can be used with a variety of consumption devices.
Thank you for highlighting my work on British American Tobacco.
My problem is with the 20% FCF yield, what happens when revenue and FCF decline? If FCF doesn't decline in the long term due to the new categories and/or price offsetting volume drop, it's a nobrainer.
Otherweise you have to reduce debt to maintain the same leverage (debt/FCF). But when you constantly have to reduce debt, FCF available for distribution declines even further, with a double pace depending on the leverage. So if I'm correct, you have to deduct not only the rate of decline from the FCF yield, but more, to get to the shareholder return?
Good write-up, one question though - where do you get the market cap of $51b from? Market cap appears to be ~$68b. Wondering if you may have accidentally used the GBP market cap (but used the USD FCF to conclude a P/FCF of 5)?
A very sensible perspective, Dan. I appreciate the shoutout toward Invariant. If you'd ever like to talk specifics of BAT or other industry names, never hesitate to reach out.