Buy British American Tobacco (BATS) at 2262.5p

Says cautious, long-term blue chip investor Robert Sutherland Smith of UK350.com.

RSS tipped this share to UK350 members at 2091p on 30 June. Since then, it has risen 8.2%. For more information about UK350.com click here.

With the mood of change in the international situation seeming to move towards greater division between governments and rise of deflationary measures across Europe lead by Germany and now joined by the UK, I am suggesting a defensive high yield equity investment: British American Tobacco (BATS). Although it is generally considered more defensive it is also a growth stock with a truly impressive long and more recent reputation for increasing dividend payouts.

There are a number of reasons for looking at BAT. Not only has the dividend grown each year since December 2005 but that growth expressed at a compound rate has been 20% p.a. In other words a dividend of 47p in 2009 was increased to 99.5p in 2009. The shares are selling on an historic dividend yield of 4.75% ,covered 1.5times by historic earnings of 153.8p.

It is estimated that growth in revenue, earnings and dividends will continue to grow strongly this year, to December 2010 and next year to December 2011. Central estimates of revenue growth are 7.0% for this year and 4.4% next year. As a result, it is estimated that earnings per share will be 177.5p this year, rising to 190.5p next year. Divided payout to share holders are forecast to be 112.4p this year and 123.3p next year.

At the interim stage, the company said that it had sufficient finance for the foreseeable future and unused banking facilities of GBP1.75 billion. The group is strongly cash generative, generating GBP3.87 billions of cash from operations and had GBP2.2 billion of cash and near cash in the balance sheet.

In 2009 BATs produced a gross margin of 72%, a net margin of 20.8%, a return on total assets, which geared up produced return of equity of 37.3%. Total assets were geared by total debt to the tune of 42%. That is below last year’s 47.6%. The company’s market share in its 40 markets remained in line with the same period a year ago. In Brazil and Romania, industry volumes fell but BATs increased its market share. Solid revenue growth was reported.

So at the current price BATs is valued at 11.8 times next years estimated earnings and on an estimated dividend payout yield of 5.8% after 5.3% for the current yield. BUY.

Key Data

EPIC: BATS
Market: Full
Spread: 2261p - 2264p (0.13%)

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