Dividend Tracking: The Undervalued Dividend Aristocrat

Christopher Johnson: Welcome to Dividend Watch, my name is Christopher Johnson.

British American Tobacco (BATS) was recently given a 5-star Morningstar rating by analysts for being significantly undervalued.

The British tobacco giant is currently trading at £28, well above Morningstar’s estimated fair value of £39.

Supporters of the company argue that the purchase of Reynolds American gave the company perhaps the second best position in the US cigarette market.

Meanwhile, the business generates enough revenue across continents, giving it diversification against individual country regulatory risks and changes in consumer preferences.

However, BAT faced headwinds, particularly in the US, its biggest market, due to declining cigarette sales.

This decline was driven by people switching to cheaper and alternative cigarette brands.

The company is still betting on alternative products as a growth engine, with a target of 50% of revenue coming from products such as Vuse vapes and Glo heated tobacco devices by 2035.

However, rival Philip Morris International has a significant lead in heated tobacco, which will be difficult for BAT to narrow.

In addition, the bears argue that BAT’s international exposure creates significant currency risk, given that most of its debt is denominated in US dollars.

Therefore, a strengthening of the US dollar could affect its ability to service its debt.

BAT pays investors a quarterly dividend of 58p.