Questor share tip: Hold British American Tobacco for 4.4pc dividend

British American Tobacco
£35.23 -44p
Questor says HOLD

British American Tobacco’s [LON:BATS] first-half profits were hit by the strength of the pound but shareholders should stay focused on the long-term performance instead of being sidetracked by fluctuations in global currency markets.

Europe’s largest tobacco group is focusing on its core global brands of Rothmans, Dunhill, Lucky Strike and Pall Mall and has been able to increase prices despite the subdued market backdrop.

Sales growth, stripping out moves in currencies, was 3pc. Sales volumes, which is measured by the number of cigarettes sold, dropped 0.4pc, but this was an improvement on the 2.7pc fall in the same period last year. BAT’s volumes are also falling at a slower rate global industry as a whole, which is declining by 2pc to 3pc each year.

The cigarette group is using its strongest brands to expand in emerging markets, where cigarette volume was up by 5.7pc during the first half. The company said it was taking market share in Asia-Pacific, Brazil and South Africa where sales of Dunhill were up 4.9pc, and this offset declines of the Kent brand in Russia and Romania

The interim dividend was increased 6pc to 47.5p and the shares go ex-dividend on August 20 with a payout on September 30. The prospective yield is 4.1pc, rising to 4.4pc next year.

The pricing power that tobacco companies have is exceptional because people are addicted to their product and emerging economies are taking up some of the slack from Western markets where volumes are falling the fastest. These companies continue to be cash-generating machines that are ideal for income seekers, as long as they put the ethics of their investment to one side.

Trading on a 2014 earnings multiple of 16.8 falling to 15.5, the rating remains hold.