British American Tobacco PLC (BTI) has a hidden asset worth $16.5 billion with the company trading at just 6 times its free cash flow. The company’s recession-resistant product and 10% dividend yield make BTI an attractive investment as risks around its U.S. business subside. Despite recent negative headlines, the stock may have already reached its bottom.
British American Tobacco’s free cash flow has been growing at a compound annual rate of 6% over the past two years. With a free cash flow yield of 16%, the company’s 10% dividend is well covered. The company also owns a 25% stake in ITC Ltd., a conglomerate in India, which is valued at $16.5 billion. British American Tobacco has been selling some of its ITC shares at a higher multiple to buy back its own shares at a lower multiple, showcasing smart capital allocation.
The company’s scale gives it a wide moat, providing bargaining power with suppliers and efficiency in distribution. The tobacco industry has favorable competitive dynamics with strict regulations and advertising bans keeping smaller competitors at bay. British American Tobacco’s primary competitors are Philip Morris International Inc. and Altria Group Inc., both of which operate in different markets, giving BTI a competitive advantage.
Tobacco is a recession-resistant product, with consistent cash flow even during economic downturns. The company is transitioning towards non-combustibles, which are seen as reduced-harm products and are expected to drive future growth. British American Tobacco’s non-combustibles segment now accounts for 16.5% of its revenue and has become profitable ahead of schedule.
Despite some risks, such as a potential menthol cigarette ban in the U.S. and illicit vapor products circulating in the market, British American Tobacco’s long-term prospects remain strong. The temporary cancellation of the menthol cigarette ban by the U.S. government and potential crackdown on illicit vapor products could boost sales for the company. Overall, with its attractive valuation, hidden asset, and strong business fundamentals, British American Tobacco presents a compelling investment opportunity.
