Value investing is a popular strategy for beginners. Made famous by Warren Buffett, value investors look for stocks that are selling at a discount to market value, usually because of a problem, but one that is likely to be solvable. The value investing strategy focuses on large, high-quality companies offering a dividend.
Today I’m looking at two companies I think would make great additions to a value investor’s portfolio, British American Tobacco (LSE:BATS) and Britvic (LSE:BVIC).
Tobacco in turmoil
FTSE 100 constituent BATS sells cigarettes and related tobacco products internationally. Its share price chart shows an impressive continuous climb until 2017, at which point it declined. This was mainly because a large tax liability it had deferred greatly increased and it purchased Reynolds American for $49bn to create the world’s largest listed tobacco firm. Combined, these factors caused its overall liabilities to triple.
But many investors are also increasingly concerned about the long-term sustainability of tobacco as a business model, although BATS is facing up to this. There are several alternative products entering the space with vaping and e-cigarettes having already made an impact, while the approach to cannabis is rapidly being liberalised and it’s being used in medical treatments in many Western countries. This is something tobacco companies are well placed to exploit.
BATS is already involved in vaping and as far back as 2017 planned to take over South African e-cigarette maker Twisp. This faced opposition but yesterday, the company agreed to a set of conditions lasting five years, which resulted in approval for the deal.
I think this is a positive move for the company and will help position it more favourably in the substitute smoking product market.
Sitting at around £30, the BATS share price is over 50% undervalued compared to its projected future cash flow and earnings per share is £2.69.
The company offers a 6.7% dividend yield, which is above the market’s top 25% of dividend payers in the UK and dividends per share have increased over the past 10 years.
I think its trailing price-to-earnings ratio (P/E) is low at 11, which is a potential buy signal to me, especially as it has confirmed rising sales from a new generation of products. In my opinion, BATS is a good buy-and-forget share for a balanced portfolio.
Drink up!
Britvic is a manufacturer of soft drinks, primarily in the UK, France and Brazil. It features several famous brands among its offerings including Pepsi Max and Robinsons. A period of capital investment to improve British manufacturing and distribution has reached completion and Britvic’s approximate £8.65 share price is over 41% undervalued compared to its future cash flow value.
The FTSE 250 company delivered another reasonably strong financial performance with its latest results in a challenging environment and it has had a competitive edge since beverage manufacturers were faced with the sugar tax (many of its drinks were already low sugar).
Its P/E is reasonable at 19, EPS is 44.5p and the yield is 3%. With its £2.2bn market cap and licence to distribute Pepsi and 7Up in the UK/Ireland, I think the company is well placed to keep adding value.
These two companies have very large market caps, feature in the FTSE 350, provide dividends and have enjoyed previous steady growth. I think they both have the potential to climb again and I consider each a Buy.
