Group 1 - British American Tobacco (BTI) is currently outperforming its Consumer Staples peers with a year-to-date return of approximately 22.8%, compared to the average gain of 5.5% in the sector [4] - The Zacks Rank for British American Tobacco is 2 (Buy), indicating a positive earnings outlook as the consensus estimate for full-year earnings has increased by 0.2% over the past 90 days [3] - In the Tobacco industry, which includes 6 companies, British American Tobacco ranks 26 in the Zacks Industry Rank, slightly underperforming its industry average return of 26% this year [5] Group 2 - The Consumer Staples group, which includes British American Tobacco, is currently ranked 12 within the Zacks Sector Rank, reflecting the strength of the sector [2] - Vital Farms (VITL), another stock in the Consumer Staples sector, has significantly outperformed with a return of 94.2% since the beginning of the year [4] - The Food - Miscellaneous industry, where Vital Farms belongs, has a Zacks Industry Rank of 99 and has seen a slight decline of -0.2% this year [6]

Core Viewpoint - The article discusses the contrasting views on portfolio diversification, highlighting Warren Buffett's skepticism towards it while suggesting value stocks for investors seeking diversification opportunities. Group 1: Portfolio Diversification - Warren Buffett believes that diversification indicates a lack of knowledge in investing, stating that "Diversification is a protection against ignorance" [1] - For average investors, diversification remains a useful strategy, with a recommendation to hold around two dozen stocks across various industries to mitigate risk without overcomplicating the portfolio [2] Group 2: Value Stocks for Diversification - The article identifies three value stocks that present opportunities for diversification: Polaris Industries, British American Tobacco, and Campbell Soup [3] Polaris Industries (PII) - Polaris Industries has seen its stock decline by 38% over the last three years due to high inflation and interest rates affecting consumer purchases of powersports vehicles [4] - The company's second-quarter results showed a 12% drop in sales to just under $2 billion and a 43% decrease in profits to $1.38 per share, with full-year revenue now estimated to be between $7.2 billion and $7.4 billion, reflecting a 17% to 20% decline from previous forecasts [5] - Despite these challenges, Polaris stock has rebounded 12% from its lows, and the company remains an industry leader with a 3.3% annual dividend yield, having raised dividends for 29 consecutive years [6][7] British American Tobacco (BTI) - British American Tobacco is a leader in reduced-risk tobacco products, with its Vuse brand holding a 40% market share in the electronic cigarette sector [8] - Cigarettes still account for over 80% of BTI's revenue, and the company maintains profitability due to price inelasticity, allowing it to raise prices without losing customers [10] - BTI stock has increased by 22% in 2024 and trades at a low valuation of 7 times next year's earnings, making it an attractive value stock for diversification [10] Campbell Soup (CPB) - Campbell Soup, while in a mature industry, has transformed by acquiring Snyder-Lance, now holding a 20% market share in the snacks sector, with pretzels alone accounting for a 41% market share [11][12][13] - The snacks division now contributes 43% of Campbell's sales, indicating potential for future growth, while the stock has risen 14% year-to-date and trades at 15 times next year's earnings estimates [14]

Group 1: Market Overview - Consumer stocks are currently in a unique position, with many consumer discretionary stocks being oversold due to economic uncertainty, while consumer defensive stocks offer protection against market volatility [1] - A rigorous screening process was undertaken to identify three prudent consumer stocks, focusing on a mix of undervalued and low-beta assets [2] Group 2: Constellation Brands (STZ) - Constellation Brands is classified as a consumer staples stock, providing a defensive play in the market [4] - The company has a strong market position and an operating profit margin of 35.45%, indicating economies of scale and price flexibility [5] - STZ stock has a "buy" rating from Goldman Sachs, with expectations for the stock to reach $300 [6] - The stock has decreased by approximately 8% over the past year, with a forward price-to-earnings ratio of 18.15x and a forward dividend yield of 1.64% [7] Group 3: Ford Motor Company (F) - Ford's stock is considered to have deep value, having declined by about 20% year-over-year due to weaker sales and rising input costs [8] - Despite recent challenges, Ford remains a market leader, with a slight decrease in vehicle sales of 0.2% year-over-year [9] - Ford's Electric Vehicle (EV) sales increased by 31.2% year-over-year, indicating growth potential in this segment [10] - The stock has a price-to-earnings-growth (PEG) ratio of 0.56x and a price-to-sales ratio of 0.22x, suggesting it is undervalued [11] Group 4: British American Tobacco (BTI) - British American Tobacco offers a blend of defensive and value investment opportunities, with a focus on consumer staples [12] - The company is restructuring and has increased its stake in Canadian cannabis producer Organigram to 45%, indicating diversification [12] - BTI is targeting a net EBITDA ratio of 2x to 2.5x, which could enhance value for investors [13] - The stock has a forward price-to-earnings ratio of 8.06x and a forward dividend yield of 8.15%, appealing to income-seeking investors [14]

Core Viewpoint - British American Tobacco (BTI) has transitioned from a "Hold" rating to a "Buy" rating due to improved market sentiment, strong stock performance, and positive developments in its business transformation towards smokeless products [2][15]. Business Description - British American Tobacco is a major tobacco company shifting from traditional combustibles (cigarettes) to smoke-free products. The combustibles segment accounted for 80% of revenue in H1 2024, down from 83% in December 2023 [4][5]. Stock Performance and H1 Earnings - The stock has shown a significant increase of 19.5% since the last article, with a notable 15% rise in July alone. H1 2024 results indicated a 7.4% increase in revenue from new categories, while combustibles revenue declined by 2.6% [6][7]. Transformation to a Smoke-Free World - The company aims for half of its revenue to come from non-combustible products by 2035. Recent FDA approvals for e-cigarette products suggest a more favorable regulatory environment than previously anticipated [9][10]. Deteriorating Core Business - The legacy combustibles business continues to decline, with a 2.6% drop in sales in H1 2024. However, regulatory changes that were expected to accelerate this decline have been delayed, providing a more stable outlook for the combustibles segment [10][11]. Dividend Sustainability - BTI currently offers a 10% dividend yield, which is supported by the monetization of its ITC stake valued at $13.3 billion. This development has significantly reduced the risk associated with dividend sustainability [11][12]. Valuation and Market Sentiment - The stock appears undervalued based on DCF models, and recent positive developments have shifted market sentiment, leading to a surge in stock price. The current price-to-earnings multiple is at its lowest in a decade, indicating potential for further growth [12][13].

Federal Reserve Policy and Economic Outlook - Jerome Powell's comments suggest a potential rate cut in September if inflation trends down and the labor market remains stable, indicating a shift from restrictive to accommodative monetary policy [2][3] - The Federal Reserve has raised its policy interest rate by 5.25 percentage points since March 2022, with current inflation measures showing signs of easing [3][4] - The Fed's recent statement reflects a consensus that the inflation battle is nearing its end, downgrading inflation's description to "somewhat elevated" [4] Economic Indicators and Market Reactions - Following Powell's remarks, interest rate futures, stocks, and Treasury bonds rallied, with a notable increase in the probability of a significant rate cut in September [3] - The yield curve is reverting towards positive, which historically precedes recessions, but current economic indicators show a 2.8% real GDP growth for Q2 [5][6] - Employment metrics indicate a decline in full-time employment, which typically aligns with recession periods, yet the economy shows resilience [6] Investment Strategies in a Rate Cut Environment - In anticipation of rate cuts, investment strategies should focus on stocks that exhibit characteristics similar to long-term investment-grade bonds, particularly those with strong dividends [9][13] - Stocks like Broadcom (AVGO) have shown significant price increases due to their future cash flow potential, despite being dividend-paying [10] - Defensive sector stocks, such as Pfizer (PFE), British American Tobacco (BTI), and Verizon (VZ), are highlighted as attractive investments due to their stable dividends and cash flow [16][19][22] Specific Stock Recommendations - Pfizer (PFE) is recommended for its solid 5.5% yield and positive revenue growth outlook, despite high debt levels [16][18] - British American Tobacco (BTI) is noted for its strong cash flow generation and resilience in a competitive market, yielding 8.34% [19][20] - Verizon (VZ) is positioned as a bond proxy with a stable dividend and potential for price recovery as interest rates decline [22][26]

Core Viewpoint - The market is underestimating the upside potential of British American Tobacco (BTI), particularly regarding traditional cigarettes and the total shareholder yield, which includes dividends, share repurchases, and debt paydowns [2][6][14]. Financial Performance - BTI reported total revenue of £12.34 billion for Q2, with organic revenue stabilizing at a decline of 0.8% year-over-year. Diluted earnings per share were 200.30p, reflecting an annual growth rate of 13.8% [6]. - The company anticipates low-single-digit revenue growth overall and double-digit growth in new categories, indicating a positive outlook [6]. Market Reaction - Following the Q2 earnings report, BTI's stock experienced an 11.4% price rally, contrasting with a ~2% correction in the overall market, reinforcing its defensive stock appeal [6][4]. - The market's excitement over new category growth is acknowledged, but there is a belief that traditional cigarette potential is being overlooked [7]. Valuation Insights - BTI's stock valuation is significantly discounted compared to the Graham P/E ratio, suggesting a potential undervaluation [4]. - The Consumer Price Index for tobacco has risen from ~900 in 2014 to 1,541, indicating a 5.52% annual increase, which offsets the decline in cigarette volume [12]. Dividend and Total Shareholder Yield - BTI declared a quarterly dividend of 58.88p per share, leading to an annualized dividend yield of approximately 8.4% [13]. - The total shareholder yield (TSY), which includes dividends, share repurchases, and debt paydowns, is significantly higher than the dividend yield alone, indicating greater return potential [14][22]. Share Repurchase and Debt Reduction - BTI has aggressively repurchased shares since 2022, with a net common buyback yield peaking at around 3.4% in 2023 [15]. - The company's long-term debt has decreased from $56 billion in 2021 to $46 billion, a reduction of about $10 billion, enhancing its attractiveness to long-term investors [22].

Core Viewpoint - The article emphasizes the attractiveness of high-yield investments, particularly British American Tobacco (BTI) and MPLX LP, as viable options for income-focused investors amid changing interest rate dynamics [3][6]. British American Tobacco (BTI) - BTI has a market capitalization of approximately $77 billion and offers a dividend yield of around 8.5%, reflecting the inherent risks in the tobacco industry [4]. - Despite a 0.8% contraction in topline revenue, BTI's earnings per share (EPS) increased by 1.3% in H1 2024, aided by a lower share count and reduced financing costs [4]. - The company anticipates organic growth of 3% to 5% and mid-single-digit growth in adjusted profits from operations by 2026, with a net leverage goal of 2x to 2.5x by year-end [4]. MPLX LP - MPLX, with a market cap exceeding $40 billion, provides a distribution yield of approximately 7.9%, supported by stable revenue from logistics and storage businesses [5]. - The adjusted EBITDA growth has outpaced periodic escalators at around 6.4%, driven by organic growth and M&A investments [5]. - MPLX's distributable cash flows (DCF) have increased significantly, with an annualized Q1 2024 DCF of about $5.3 billion, allowing for surplus liquidity after covering dividends and necessary investments [5]. Market Dynamics - The article notes a potential normalization of interest rates, which could lead to increased asset prices and reduced attractiveness of current dividend yields [6][7]. - Recent data indicates the possibility of interest rate cuts, contributing to a favorable environment for income-generating assets like REITs and bonds [7].

Core Viewpoint - BTI is seen as an undervalued company with strong financials and a significant opportunity for growth, particularly in the smokeless product segment, despite the ongoing stigma surrounding the tobacco industry [2][9][13]. Financial Performance - BTI's shares have increased by 16.81% since early April, outperforming the S&P 500, which rose by 4.10%. The total return, including dividends, is 19.62% [2]. - The company generated $15.99 billion in EBITDA over the trailing twelve months, resulting in a net debt to EBITDA ratio of 2.67x, indicating a strong financial position [6]. - In Q2, BTI reported $7.8 billion in revenue and a gross profit of $6.43 billion, achieving a gross profit margin of 82.46% and a profit margin of 36.4% [13]. Product Portfolio and Market Strategy - BTI has a diverse product portfolio, including traditional cigarettes and a growing range of smokeless products, with 17.9% of revenue now coming from smokeless products, up 1.4% since the end of 2023 [3]. - The company added 1.4 million consumers to its smokeless brands in Q2, bringing the total to 26.4 million [3]. - BTI has received authorization to market its Vuse Alto device in the U.S., which is expected to enhance its performance in the coming years [3]. Valuation and Growth Potential - BTI is trading at less than 8 times earnings, with expected earnings growth of 5.35% over the next two years, making it a compelling value opportunity compared to peers like Altria Group and Philip Morris [7]. - The company is projected to generate $10.8 billion in earnings from operations in the 2024 fiscal year, with a dividend payout of $2.97 per share, representing 61.11% of projected EPS [8]. Share Buyback and Retained Earnings - BTI repurchased 15.19 million shares in the first half of 2024 and plans to allocate GBP700 million ($901.04 million) for buybacks in 2024 and GBP900 million ($1.16 billion) in 2025, while retaining $3.3 billion in earnings for further investments [8]. - After paying dividends, BTI expects to retain $4.2 billion in profitability from 2024's earnings, allowing for continued deleveraging and investment in growth [8]. Market Outlook - The tobacco industry is perceived to be undervalued, and BTI's recent share price increase may signal the beginning of a sustainable rally, driven by strong profitability and a high dividend yield exceeding 8% [9][14]. - The market may start to favor value companies, positioning BTI favorably for future appreciation as it continues to deliver strong financial results [9][14].

Core Viewpoint - British American Tobacco (BTI) remains fundamentally sound despite recent challenges, with a strong dividend yield and potential for growth driven by improved macroeconomic conditions and successful business strategies [4][6][9]. Financial Performance - BTI's total revenue decreased by 0.8%, while adjusted profit from operations declined by approximately 5%. However, earnings per share (EPS) increased by 1.3% due to lower net financing costs and a reduced share count from share buybacks [11]. - The company managed to expand its margins by 100 basis points during H1, 2024, despite a declining top-line, aided by efficiency gains and strong contributions from new category segments [11]. Market Dynamics - The macroeconomic outlook is improving, with lower financing costs expected to enhance consumer demand for BTI's products. Recent data indicates a decrease in inflation and a potential Federal Reserve interest rate cut by the end of the year [6][7]. - BTI added 1.4 million smokeless consumers, contributing 18% to group revenue and generating an incremental GBP 165 million in cash flow. The contribution margin from new categories expanded by 10% [11]. Future Outlook - Management anticipates organic revenue growth of 3% to 5% and mid-single-digit adjusted profit from operations growth on an organic constant currency basis by 2026 [11]. - The company aims to achieve a leverage ratio of 2-2.5x adjusted net debt to adjusted EBITDA by the end of 2024, indicating a focus on optimizing the balance sheet and reducing financial risk [8][11].

Financial Performance - Net cash generated from operating activities declined by £210 million, impacted by a £267 million final payment related to settlement agreements[10] - The Group generated £4,122 million from operating activities in the six months ended 30 June 2024, a decrease of 8.9% compared to £4,522 million in 2023[14] - Net cash generated from operating activities was £3,165 million, down from £3,375 million, reflecting a decline of 6.2%[14] - The Group's total comprehensive income attributable to owners of the parent was £4,526 million, compared to a loss of £599 million in the same period last year[23] - The Group reported a profit for the period of £4,559 million for the six months ended 30 June 2024, compared to £4,035 million for the same period in 2023, representing an increase of 12.9%[34] - Total comprehensive income for the period was £4,590 million, which includes a profit of £4,492 million and other comprehensive income of £98 million[34] - The Group's total profit from operations was £4,258 million, down from £6,020 million in 2023, reflecting a decrease of 29.3%[158] - Profit from operations decreased by 28.3% to £4,258 million, with an operating margin of 34.5%, down 9.7 percentage points[58] - The profit for the period was £3,959 million, compared to £4,035 million in the previous period, reflecting a decrease of approximately 1.9%[45] - The Group's profit for the period for the six months ended June 30, 2024, was £275 million, a significant improvement from a loss of £277 million in the prior year[181] Revenue and Sales - Revenue for the six months ended 30 June 2024 was £12,340 million, down 8.2% from £13,441 million in 2023[53] - Reported revenue decreased by 8.2% to £12,340 million, primarily due to the sale of businesses in Russia and Belarus, lower organic Combustibles volume (down 6.9%), and a translational foreign exchange headwind of 4.5%[63] - Revenue from Combustibles fell by 10.1% to £9,856 million, with an organic revenue decline of 2.6% at constant exchange rates[97] - Revenue from New Categories was £1,651 million, down 0.4%, but up 7.4% on an organic constant rate basis[59] - Modern Oral revenue reported a growth of 41.9%, with volume growth of 50.0%, indicating strong market performance[74] - The Group's revenue from the AME region was £4,376 million, a decrease from £4,730 million in 2023, representing a decline of 7.5%[158] - The APMEA region reported revenue of £2,586 million, slightly up from £2,801 million in 2023, showing a modest increase of 10.4%[158] Cash Flow and Financing - Net cash from investing activities was £1,433 million, an improvement of £1,392 million from the previous year, primarily due to £1,577 million net proceeds from the partial monetisation of investment in ITC[10] - Net cash used in financing activities was an outflow of £3,358 million in 2024, compared to a £3,023 million outflow in the previous year[11] - The Group maintained investment-grade credit ratings from Moody's (Baa2), S&P (BBB+), and Fitch (BBB+), supporting its ability to access debt capital markets[9] - The Group had access to a £5.4 billion revolving credit facility, which was undrawn as of 30 June 2024[9] - The Group repurchased bonds prior to their maturity in a principal amount of £1.8 billion as part of a capped debt tender offer in May 2024[9] - The Group's liquidity remains strong, with an average debt maturity of 9.2 years and a fixed debt profile of 84%[69] - Closing net debt was £33,658 million, down from £38,345 million in June 2023, reflecting a significant reduction in financial liabilities[139] Impairments and Adjustments - The Group recognized an impairment of £472 million for Camel Snus due to a forecasted decline in cash flows, with a 5-year volume CAGR of -10.2%[16] - Amortization and impairment of trademarks and similar intangibles amounted to £1,295 million, significantly higher than £108 million in the same period last year[20] - Total adjusting items included in profit from operations reached £1,306 million, compared to £85 million in 2023, indicating a substantial increase[20] - The effect of impairment of intangibles and other assets was £373 million for the six months ended June 30, 2024, compared to £68 million in 2023, indicating increased impairment charges[171] Market and Consumer Trends - The number of consumers of smokeless products increased by 1.4 million to 26.4 million[58] - The company experienced robust combustibles pricing, with volume and value share gains in AME and APMEA, offset by declines in the U.S.[62] - Modern Oral revenue increased by 122%, driven by a 226% rise in volume following the refreshed Velo brand and the national roll-out of Grizzly Modern Oral[124] - The Group's share of post-tax results of associates and joint ventures showed a significant credit of £1,367 million in the first half of 2024, compared to a charge of £15 million in the same period of 2023[28] Tax and Legal Matters - The Group's tax rate was affected by adjusting items, with a total of £36 million in adjusting items included in taxation for the six months ended 30 June 2024[32] - The Group's exposure to tax obligations includes a provision for potential exposure to tax, interest, and penalties of BRL969 million (£138 million) for the 2020-2023 period due to ongoing tax audits[172] - The Group paid US$332 million (approximately £267 million) to the U.S. Department of Justice in June 2024 as a final settlement for a previously disclosed investigation[179] - As of June 30, 2024, the Group's subsidiaries faced 252 pending Engle progeny cases involving approximately 311 individual plaintiffs[182] Management and Governance - The company appointed Soraya Benchikh as Chief Financial Officer effective May 1, 2024, following changes in the Board[47] - The Group's management believes that value share is particularly useful for investors to understand the performance of BAT's brands relative to competitors in various categories and geographies[200]