While the FTSE 100 has thoroughly disappointed in 2014, being down 2% year-to-date, shares in British American Tobacco (LSE: BATS) have surged. Indeed, the tobacco and e-cigarette company has seen its share price rise by 11% since the turn of the year and, with a dividend yield of over 4%, this means that a total return of over 15% has been delivered since the turn of the year.
However, there could be much more to come, and British American Tobacco could beat the FTSE 100 in 2015, too. Here’s why.
Growth Potential
While the FTSE 100’s forecast growth rate of mid-single digits in 2015 is fairly impressive, British American Tobacco is set to beat it. That’s because it is expected to deliver earnings growth of 8% next year, but also has superb longer term growth prospects, too.
That’s because of its early move into e-cigarettes via its subsidiary, Nicoventures. Indeed, British American Tobacco entered the e-cigarette market in early 2013 in the UK and is attempting to grab market share in the lucrative sector, which could give it a head start versus other major tobacco companies.
While at present it remains relatively unprofitable, the e-cigarette market could stimulate British American Tobacco’s bottom line over the medium to long term. That’s because it seems to be a win-win situation for consumers and for the government. For example, the government still has the opportunity to collect a reliable and consistent tax stream, while consumers are able to use a product that contains around 5% of the toxins of traditional cigarettes. Furthermore, rules on advertising e-cigarettes are far more relaxed than for traditional cigarettes, which should allow greater product differentiation and brand building, resulting in higher profitability for British American Tobacco.
Relative Stability
In addition to strong growth potential, British American Tobacco also offers excellent stability. While the earnings of most companies depend upon the economic picture, British American Tobacco is able to provide investors with a highly visible revenue and profitability profile that has seen earnings grow by an average of 11% per annum during the last five years, with growth being recorded in each of those years. As such, even during highly uncertain periods for the wider market, British American Tobacco’s shares remain in high demand.
Looking Ahead
While shares in British American Tobacco trade on a relatively high price to earnings (P/E) ratio of 17.2, their growth potential and relative stability appear to be worthy of a substantial premium to the wider index. Indeed, while the FTSE 100 is cheaper on a P/E ratio of 14, it has lower growth potential and less stability than British American Tobacco. As such, and with the future remaining highly uncertain for the global economy, British American Tobacco could outperform the FTSE 100 in 2015, just as it is doing in 2014.
