British American Tobacco PLC (BTI) has a hidden asset worth $16.5 billion and is trading at just 6 times free cash flow. With a recession-resistant product and a 10% dividend yield, the stock is seen as a valuable investment as risks around its U.S. business fade. The company’s strong position in the tobacco industry and efficient capital allocation make it an attractive option for investors.
British American Tobacco’s free cash flow has grown at a 6% compound annual rate over the past two years, with around $10.45 billion in U.S. dollars. At a market cap of $65 billion, the company’s price-to-free cash flow ratio is just 6.20, providing a 16% free cash flow yield that covers its 10% dividend. The company also has a hidden asset in its stake of ITC Ltd., worth $16.50 billion, representing 25% of its market cap.
With a wide moat and bargaining power over suppliers due to its enormous scale, British American Tobacco has a competitive edge in the industry. Operating in an oligopoly with favorable competitive dynamics, the company is well-positioned to maintain healthy profit margins and increase cigarette prices alongside inflation. The company’s recession-resistant product and growing non-combustibles business add to its attractiveness as an investment.
The transition towards non-combustibles in the tobacco industry is expected to improve upon the health effects of cigarettes, with British American Tobacco leading the way with a strong portfolio of such products. The company’s new categories segment now represents 16.50% of its revenue, becoming profitable ahead of schedule. Non-combustibles are seen as potentially just as profitable as traditional cigarettes as they scale, with lower sales tax and growing profit margins.
Despite facing risks such as a potential menthol cigarette ban in the U.S., which is currently on hold, and illicit vapor products affecting sales, British American Tobacco’s business risks seem to be dissipating. The company’s strong fundamentals, including its recession-resistant products and growing non-combustibles business, make it a stable investment option. With the stock trading at a low valuation and a hidden asset providing additional value, British American Tobacco may be bottoming out as an attractive investment opportunity for investors.
