Opening BAT
PORTFOLIO JOHN BULL
Last week I suggested some 'dos' and 'don'ts' which I thought investors ought to take into account. That sermon has produced the entirely reasonable response that I should pick some shares in public so that we can all see how they run. I intend to .do just that, starting this week.
First, the rules: I have allotted myself £5,000. 1 shall gradually invest this sum week by week, recording my progress at the foot of this column. What sort of performance am I hoping to achieve? I do not intend to sacrifice income: I want to see at least a 4 per cent return on the portfolio as a whole. Provided that can be secured then obviously the aim is to outstrip inflation by the widest possible margin. The next question is the timescale over which one wants to operate. I believe that most readers of this journal invest on the basis of a two- to five- year view rather than with the idea of taking quick speculative profits week by week or month by month. I do not in any sense disapprove of short term market operations. They cannot, however, be realistically recorded in this column. And successful speculation requires a high level of professional expertise which few readers possess. I, too, shall adopt, therefore, a two- to five-year view but I shall not eschew decent short term profits if and as they occur.
The background against which I begin is hardly ideal: the prices of equities, as measured by the Financial Times Ordinary share index, have never been higher than they are now. I , cannot hope for a sustained rise in the market to bale me out of the dud situations which it is impossible to avoid from time to time. Indeed the likelihood is that the market will crack in the next two or three months, though not, I think, seriously. In any case, I shall attempt to build defensive qualities into the portfolio.
rhe first share on my list is British American Tobacco. Its fortunes have very little to do with the performance of the British economy, which must be considered an advantage. The fact that 9() per cent of its profits arise overseas also means that the shares provide an excellent hedge against devaluation. The management, as shown by the performance in the American market of its major subsidiary, Brown and Williamson, is first-class. All this—and here is the reason why. BAT is at the top of my list—with a share price which at 84s sells at only 9.9 times earn-
ings and provides a yield of 4.7 per cent.
The reason for this comparatively cautious rating is the relationship between smoking and cancer. Indeed, in January 1966 the us Federal Trading Commission stipulated that each cigar- ette packet must carry the warning: `caution: cigarette smoking may be hazardous to your health.' The tobacco companies' attitude—on both sides of the Atlantic—is quite simple. They will continue to spend vast sums on cancer research, not, as one might expect, in a luke- warm fashion, hoping that no link will be dis- covered. The tobacco companies want to find the link, if it exists, more than anybody else in the business because once they find it they think that they can then remove it. It is this thought which provides reassurance about the long-term prospects of the tobacco companies.
Brown and Williamson is one of the great success stories of British participation in Ameri- can business. Visitors to the United States will have noticed its four main brands—'Kool,' 'Viceroy,' Raleigh' and 'Belair.' Brown and Williamson is now the third largest tobacco company over there. Just after the Second World War its market share was 3-1- per cent. By the end of the 1950s its slice of the cake had expanded to 10 per cent. The figures since 1963 are worth repeating: in that year its market share was 10.6 per cent. In 1964 it was up to 11.8 per cent, in 1965 it reached 13.1 per cent and last year it was 14 per cent. Brown and Williamson was first in the field with filters, first with mentholated filters and first with coupons. On the marketing side it pays particu- lar attention to supermarket outlets. Altogether Brown and Williamson provides 37 per cent or so of BAT'S total profits. Other major sources of earnings are Europe (15 per cent), Latin America (19 per cent), Africa (7 per cent) and Asia (5 per cent).
The current situation is as follows: pre-tax profits in the first six months of the year were £1 million higher at £48 million. This improve-
went is continuing and there is an obvious chance that the dividend rate will be raised again. Dividend cover is ample.
You can also argue that BAT is cheaper than it looks. On Wall Street tobacco companies are rated more highly than they are in London. The group also has important marketable invest- ments—Wiggins Teape and Mardon Inter- national, for instance—and a vast amount of cash (£75 million or so). Thus the tobacco assets themselves are selling at the low multiple of around seven times earnings.
Valuation at 4 October 1967 100 BAT ordinary shares at 84s .. £420 Cash at Bank .. £4,580 Total £5,000
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