Market volatility creeps up and British American Tobacco is a cash machine

“It’s been quite a week for the markets with a shock from US inflation growing faster than expected, and now we’ve got confirmation that Omicron tripped up the UK economy in December, albeit by a smaller amount than forecast,” says Russ Mould, Investment Director at AJ Bell.

“Last night on Wall Street, US stocks took a tumble on fears that the high inflation rate could prompt the Federal Reserve to be more aggressive with its interest rate hikes.

“This week’s US inflation numbers have pushed up the Vix ‘fear’ index once again, indicating that investors expect more volatile market conditions. In a nutshell that means more ups and downs with share prices.

“Ever since the pandemic struck, we’ve become accustomed to wild share price swings on the market and a 1% daily move is no longer considered a very good or bad day. It’s become part of the furniture.

“Investors have become jumpy which explains the over-reaction to any bits of good or bad news from companies. Day traders might like the volatility, but long-term investors are going to have to dial out even more noise than normal.

“In terms of company news on Friday, Tate & Lyle topped the FTSE 350 leader board, up 8% on an upbeat trading statement which sets a positive scene ahead of its imminent business restructuring. The company is selling a controlling stake in its North American sweeteners and starches business, leaving the rest of Tate & Lyle as a higher quality operation with better growth prospects.”

British American Tobacco

“It previously looked like British American Tobacco was firmly out in the cold with the market but a recent shift in investor preference towards value stocks and an improved operational performance from the company has lit up the stock once more.

“Obituaries for the tobacco sector have been written before and some high profile fund managers made their bones in the 1990s by going against the grain and investing in the space, making a lot of money from a subsequent smoking run for cigarette stocks.

“However, will any reprieve be temporary this time? The shift in regulation, consumer habits and the increasing importance of ethics in investing all count against the sector.

“For anyone prepared to put aside moral considerations there was plenty to celebrate in British American Tobacco’s full year results.

“The best free cash flow cover for its dividend in more than a decade, a big reduction in net debt, increased dividends and a new share buyback all served to illustrate how cash generative the company remains.

“It is also a business with pricing power; the addictive qualities of its product mean people will continue to buy cigarettes even if prices are hiked. This makes British American Tobacco better placed than some when it comes to seeing off the challenge posed by inflation.

“To really convince the market it has a viable long-term future British American Tobacco needs to show it is moving with the times and, after something of a false start, it appears the company’s New Categories business – selling vaping and e-cigarette products – is finally gaining some traction.

“Revenue for this part of the group is growing rapidly, a trend forecast to continue in 2022, though the unit is expected to remain loss-making until 2025.

“Perhaps British American Tobacco might be tempted to go down the route of renaming itself, as its UK-listed peer Imperial Brands did in losing the Tobacco moniker, somewhat disingenuously, in 2016. British American Blend anyone?”

These articles are for information purposes only and are not a personal recommendation or advice.