UK Edition
Questor: lowly valuation and chunky yield make this tobacco firm a core income holding
This column’s assertion late last year that British American Tobacco would remain a consistent provider of dividends and a potential source of capital protection in the event of wider market squalls has not been entirely supported by subsequent events.
Interim results released late last month confirmed the payment of the latest 48.8p quarterly dividend but the shares have fallen by around 15pc since our initial analysis.
However, the interims looked perfectly solid, as management got down to the job of integrating Reynolds American after its £41.8bn acquisition last year.
Cash flow was particularly strong, to underpin analysts’ forecasts for further dividend growth following an unbroken record of annual increases that stretches back over two decades. A forecast yield of 4.8pc for this year and more than 5pc for next is not to be sniffed at, especially as interest rates are rising at a snail’s pace at best and gilt yields remain miserly.
In addition to delivering higher profits and cash flow, the chief executive, Nicandro Durante, reaffirmed the group’s target of generating more than £1bn in sales from “next-generation” products – in other words, not cigarettes or cigars – in 2018, as part of a plan to reach £5bn by 2022.
Strong progress from Vype, iFuse and Glo should help to reassure any investors spooked when American rival Philip Morris admitted to disappointing sales of its iQOS “heat not burn” tobacco product in Japan earlier this year.
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Intriguingly, the interims seem to be prompting a rally in the shares, which may now be attracting contrarian value seekers as well as income hunters.
The key risk remains regulation, in the form of requirements for plain packaging, higher taxes, even in emerging markets, and US watchdogs’ proposal to set a nicotine standard and perhaps limit the nicotine content of tobacco products.
But the tough talk has yet to translate into legislation and even if it does there has to be a good chance that a lowly price-to-earnings multiple of 14 factors in a lot of the dangers, while that chunky yield also offers some compensation for the risks involved. BAT remains a core income holding.
Questor says: hold
Ticker: BATS
Share price at close: £41.73p
Update: Trufin
A successful fundraising by a firm in which it has a stake supports Questor’s sum-of-the-parts valuation case for Trufin, the financial services firm.
Apart from its forecourt lending business, early invoice payment systems and cash flow management solutions, which are in various early stages of development, Trufin has a stake in Zopa, the peer-to-peer lender.
The initial 15pc holding was on the books at £36.5m or 37.5p a share. Zopa has now raised a further £44m. Trufin did not participate so its stake slides to 13pc, but the deal increases the value of its holding to £44.5m or 45.7p a share. That is one of the potential positive catalysts for the stock we identified in May now safely in the bag.
Loan growth and rising customer numbers in the solutions businesses could also help the share price, as would a successful application for a banking licence, which could help cut funding costs.
Early-stage, loss-making minnows are not for everyone but Trufin’s potential means risk-tolerant investors can speculate to accumulate.
Questor says: hold
Ticker: TRU
Share price at close: 220p
- Questor archive: telegraph.co.uk/questor
Update: Provident Financial 7pc 2020 bond
This bond may not offer the capital appreciation potential of shares in Provident Financial, but the doorstep lender’s recent announcement that it intends to resume dividend payments is good news for its fixed-income investors.
That is because bondholders outrank shareholders in the creditors’ pecking order and bond coupons always get precedence over dividends, to suggest that the £7-a-year payments look safe. They equate to an annual yield to maturity of 4.9pc, allowing for the capital loss at redemption.
Questor says: hold
Ticker: PFG7
Bond price at close: 103.35p
Russ Mould is investment director at AJ Bell, the stockbroker