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Why I think this FTSE 100 champion presents an opportunity

Jabran Khan
Person smoking cigarette

Any downturn in the market, such as the one we are experiencing now, throws up some interesting opportunities.

The opportunity that caught my eye in this particular downturn is  a 7% yielding FTSE 100 stalwart that could be a good long-term growth pick. It released its full-year results ending December 2019 just yesterday.

British American Tobacco (LSE:BATS) is the second-largest cigarette maker in the world. Home of brands such as Benson & Hedges, Dunhill, Lucky Strike, Pall Mall, and Rothmans, the London-headquartered manufacturer is a major player in its industry.

Smoking rates are declining across the world and governments are making business more challenging for the tobacco industry with increasing regulation. In response, players such as British American and rival Imperial Brands are diversifying. 

British American possesses market-leading positions in approximately 50 countries, as well as operations in approximately 180 countries. It is also trying to conquer the new vaping market, which has been slightly affected by a health scare in the US.

Recent results and strategy

British American revealed yesterday that its revenue rose nearly 6% to £25.8bn last year. Profit rose almost 8% to £11.1m. Strong cash flow also saw debt reduced by 4%. 

This is always a positive sign in my eyes. A company’s debt can be off-putting to an investor, but the ability to build a strong cash flow and pay off debt shows good performance and decision-making. There has always been scrutiny towards British American’s debt levels in the past, however these recent results should keep detractors at bay. 

The firm also announced that a growth strategy is reaping rewards as revenue from “new categories” such as vaping and e-cigarettes increased over 35% compared to last year. Further to this, management maintains confidence in this strategy to continue growing, with an ambitious forecast of £5bn in revenues from before the end of the decade. 

Over the last few years British American has continued to perform valiantly, enjoying consistent success, which is why I have no doubt it could be a good long-term growth pick.

Share prices over the last 12 months have seen an increase of almost 15%. Its dividend per share has been increasing every year over the past five years. Its price-to-earnings ratio, which currently stands at just under 10, could be interpreted as a business currently being undervalued. On the other hand, this current level does represent a certain amount of safety.

What I would do now

On the back of results and general performance over the previous few years, I think British American Tobacco presents opportunity to pick up shares cheaply, compared to previous trading prices. 

The potential it is showing for me is unrivalled in its industry. Some of the key factors as I have discussed are the strong cash generation, growth strategy, and emerging new products, as well as ability to pay off debt.

I believe this stock could be an income champion and a worthy addition to a portfolio.  

The post Why I think this FTSE 100 champion presents an opportunity appeared first on The Motley Fool UK.

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Jabran Khan owns no shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020