If you’re not worried about the ethical implications of investing in tobacco companies, then being a shareholder of British American Tobacco (LON:BATS) over the last decade would have been a very profitable experience.

The shares have risen from around 700p in 2002 to more than 3,000p today.  Along the way it’s paid out another 700p in dividends which gives a total gain of approximately 3,000p on an initial 700p investment.  That’s more than 400% in 10 years compared to the FTSE 100’s total gain of nearer 50%.

But just because a stock has had a great past, it doesn’t automatically follow that it has a great future.  The company could run into problems, or we could just be overpaying at today’s prices, so let’s dig in and see how British American Tobacco shapes up for the next 10 years.

Start with safety in mind

As a defensive value investor I like to start off by looking at how robust the company is, in order to get an idea of how well it can cope with the harsh capitalist environment in which most companies exist. 

Diversity – Whether it be products, suppliers, customers or locations, diverse operations can help a company to survive problems in any one area.  The most obvious sign of diversity for British American Tobacco is that it is incredibly international, selling tobacco products to over 180 countries with revenues spread fairly evenly between all the continents of the world.  If one region becomes less friendly towards tobacco, the company has other regions to sell in to.

Consistency – Estimating the intrinsic value of a company is not an easy thing to do, but it’s child’s play compared to predicting the future.  However, both of these tasks can be made somewhat easier if the company you’re looking at has a consistent history.  By consistent I mean consistent results in terms of sales, profits and dividends, as well as a consistent operating history, i.e. they’ve done the same thing for a long period of time.

British American Tobacco ticks both these boxes.  They have been in the tobacco business for more than 100 years and more recently they’ve turned out consistent results and returns to shareholders.  Both earnings and dividends per share have increased in every one of the last 10 years, from 66p and 35p respectively…

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