Tobacco: A new tech sector

In a scenario of higher rates, inflation and a slower growing world, consumer staples, products that have low elasticity of demand; that people will continue to need, should provide investment safety if not gains. This sector has pricing power, brand recognition, supplier scale and distribution. I have a sizable position in British American Tobacco (BTI), a very resilient high free cash flow generating company. Despite a health push and gradual decline in tobacco smoking in developed markets, overall global volumes continue to grow while smokeless tobacco gains traction.

I compared BTIs performance to other tobacco stocks as well as a few global consumer staple companies. The two items that stand out are valuation and dividend yield. Tobacco stocks are at half the valuation (12x PE) for twice the yield (5.8%) despite similar EPS growth, at least in YE22. (See comp table)

UK stock have an added advantage in that they avoid tax withholding and thus the net dividend yield is substantially higher for non-UK residents.

I also compared the stocks total return, that includes dividends, and found that BTI and all tobacco stocks had a stellar outperformance vs the large and emblematic consumer companies such as Coke, Nestle, PG and Unilever as well as the SP500. The combination of slow but steady growth, low valuations and high free cash flow produced high dividend yields that compounded making for exceptional returns. BTI returned 2637% vs 399% for VOO the Vanguard SP500 ETF and 381% for Coke another health-conscious product.

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