New Trade for September 30th, 2020

Uncertainty generated by last night’s  debate could weigh heavily on the markets as we close out a dismal month.  Talks of a new economic stimulus bill are ongoing, but there haven’t been many signs of progress.  With so much uncertainty looming, it’s a good reminder to maintain diversification in your portfolio, including some defensive positions.

Consumer staples stocks can provide an important defensive aspect to protect your portfolio in uncertain times.  Consumer staples products include household goods, food, beverages, hygiene products and other items that consumers are unwilling or unable to eliminate from their budgets, even in times of financial trouble.  The tobacco industry has been a consumer staples darling to investors for much of its history.  However, declining use of conventional tobacco products has taken a toll on the industry, but the market may be overlooking some important information.      

British American Tobacco (BTI) share price has declined 19% over the past three months amidst a slide for the entire industry.  But the company’s financial’s over the long term look respectable enough to suggest that in this case, the baby may have gotten thrown out with the bathwater.  

The company’s ROE is predicted to rise 12% over the next three years.  Return on equity for BTI is currently 9.4%.  Furthermore, BTI has paid dividends for at least ten years which means the company is serious about sharing profits with its shareholders.  Currently BTI pays a nice 9.31% dividend yield.

Conventional tobacco will likely continue to drive the profits and the cash flow needed to support BTI’s dividend yield for at least the next ten years.  However, tobacco companies know the long-term future hinges on electronic cigarettes and other next-generation products.  British American may be the best-positioned tobacco company in emerging categories, given its Vype brand and Vuse investment.   


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