I thought I'd share a stock idea with you that Scores well in the Compound Income Scores and currently sits in the portfolio based on these. I think it looks quite good in these unprecedented times, although as the title suggests I'm sure it may not be to everyone's taste. So with that in mind I'll flag up front that it is a well known FTSE stock called British American Tobacco (BATS) the well known cigarette manufacturer which is currently trading at around £31 per share.
So if that hasn't put you off what's the Score on this one? Well using the Scores as my prompt I'll take you through it. So first of all how does it stack up on value? Well on this front it ranks in the top quartile of the Scores at 78 as it has a decent dividend yield of 6 to 7% & an earnings yield in excess of 8%. While on more conventional value metrics it is on a PE of 9 to 10x.
While on the dividend cover it Scores at just 38 as they are distributing about 65% of their net income or about 1.5x earnings cover. It is similar on cash flow cover too which is OK. So not brilliant on this front, but acceptable I would say, particularly at a time when many others are passing or scrapping their dividends. Plus it seems to be a pretty steady business which is still in the main operating at the time of writing.
On the growth front at their recent virtual AGM they did confirm their full year dividend for 2019 would rise by 3.6% based on the 65% pay out ratio. While for the coming year they suggested that they expect to see high single digit growth in earnings and therefore analysts seem to be expecting a similar rate of increase in the dividend. Thus with this and their 5 year historic growth rate of 6.5% per annum in the dividend means they Score 69 on the dividend growth factor. In reality it may well end up being better than this as more eventually cut and don't grow their dividends this year. On the back of that they have seen some upgrades in the last month which means that their Estimate revision Score is also in the top 10% of Companies, as most have been seeing downgrades recently.
On the balance sheet or financial security they do have quite a bit of debt but its cost is well covered by their profits and cash flow, while their balance sheet has improved in the last year so it Scores in the top 20% here with a Score of 80. While in terms of the quality of the business it also Scores well here with a 91 as it has made decent operating margins of over 50% and a Return on Capital Employed of nearly 15% in the last 5 year. It is worth noting though that these figures have come down a bit in recent years as they have invested in their new generation of safer vaping / heating type products.
Putting that altogether that puts it on a Compound Income Score of 98 one of the highest Scoring, as 100 is good and 0 is bad. As such it remains in the Compound Income Scores portfolio and I've used some of the cash in my ISA to add it to that too as it looks like a pretty good steady income / growth stock to me in the current unprecedented environment. While looking at the rating and thinking about the dearth of income opportunities I think there could also be scope for the market to have a re-think on this one and possibly re-rate it back up again a bit. Indeed just valuing it on this years forecast dividend of 220p at a 6% yield could equate to a price target in excess of £36 for example.
Any way that is probably enough on such a big boring stock but you can learn more about it and their ESG credentials which they are trying to push with their new Better Tomorrow strategy at their Corporate website and do further research if you are not put off by what they do.
Finally I think this helps to show the value of watching out for Company announcements in the current environment. I would also say it also highlights the strength of the Compound Income Scores in quickly helping one to identify attractively valued, quality companies with which to grow and compound your income over time, although I'm biased, but that's the point of them. If you'd like to learn more about the Compound income Scores and how you can gain access to them then please click here or watch the video below. Thanks for reading if you got this far, take care, stay alert, get more exercise and stay well.