UK Edition
Questor: when many stocks look fully valued, hold BAT for a little ballast in your portfolio
This column is aware that some of its recent tips – JackpotJoy, Cobham and Provident Financial bonds, for example – have been at the riskier end of the spectrum. This reflects how hard it is to find value today, amid a bull market in pretty much any liquid asset you can think of (and a few illiquid ones for good measure).
After an eight-year gain in the London stock market, risk should be carefully calibrated, and a portfolio be built to withstand a range of scenarios, good, bad or indifferent. Consequently, relatively defensive stocks such as British American Tobacco (BAT) feel like sensible candidates for our portfolio.
As noted when we first assessed the stock in August, certain concerns cannot be dismissed lightly, including a Serious Fraud Office investigation into allegations of bribery in Kenya, an investigation by the US Food & Drug Administration into lowering nicotine levels in cigarettes, and the continuing shift to plain packaging in the West.
But these stories are no longer news to people and the company’s share price has ultimately had time to digest them.
A retreat in the summer means the shares could again prove to be attractively valued, especially as the completion of the full acquisition of Reynolds American, a continuing cost-cutting drive and the development of “next-generation” products all mean that earnings are still forecast to grow.
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BAT outlined its plans for next-generation products last week. Its goal is to grow revenues from products such as Vype, iFuse and Glo by a factor of 10 to £5bn by 2022 – almost a quarter of current sales.
Even though margins are lower than on tobacco-based products, this should help to support profits as BAT manages declining volumes in the West through cost cuts and continues to cultivate growth in emerging markets.
The 3.7pc prospective yield is well covered by earnings and cash flow and looks perfectly respectable for a stock with a history of dividend growth that reaches back to the late Nineties.
The stock can provide useful portfolio ballast at a time when rising markets mean the disciplines of valuation and risk management must not be forgotten.
Questor says: hold
Ticker: BATS
Share price at close: £49.17
Update: GB Group
A fresh surge in the shares of GB Group, the identification security management experts, following an upbeat trading statement leaves us with a profit of about 85pc since we tipped them a year ago.
Price to earnings multiples of 36 to March 2018 and 32 to March 2019 are pretty rich but the firm’s strong niche position means momentum players will be happy to hold as strong trend earnings growth allows the company to grow into its rating.
Sales rose by 40pc, helped by the £73.8m purchase of PCA Predict, a specialist in postcode validation. Excluding acquisitions, sales still rose by 17pc. The forecast from Chris Clark, the chief executive, of a first-half operating profit of £10m leaves the firm on track to meet expectations for the full year, while recurring revenues provide strong visibility for the second half.
The shares are due a pause but the firm is a strong long-term growth story.
Questor says: hold
Ticker: GBG
Share price at close: 437.75p
Update: Connect
By contrast with GB Group, our buy note on Connect, the distribution firm, a year ago has not gone to plan. While our view that cash flow would support the fat dividend has proved correct, the share price has plunged, leaving us with a 19.5pc book loss (albeit one lessened by the divis) and a dilemma as the full-year results provided grist for both the bull and bear cases.
Supporters will point to the new £15m cost savings drive, a reduced debt pile and a 3pc increase in the dividend to 9.8p – enough for a 10.3pc yield. Sceptics will note underlying falls in sales, profits and earnings per share, the challenges that face newspaper distribution and the competitive nature of the freight market.
A lowly p/e and high yield are normally a warning sign so momentum players will stay away but the dividend and cost cuts may well provide support at these levels.
Questor says: hold
Ticker: CNCT
Share price at close: 112.25p
Russ Mould is investment director at AJ Bell, the stockbroker
- Questor archive: telegraph.co.uk/questor