We came across a bullish thesis on British American Tobacco p.l.c. (BTI) on Waterboy’s Substack by Waterboy Investing. In this article, we will summarize the bulls’ thesis on BTI. BTI Technologies, Inc. share was trading at $37.44 as of Sept 20th. BTI’s forward P/E was 7.88 according to Yahoo Finance.

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British American Tobacco (BTI) is a tobacco behemoth that can be a good buy due to its textbook definition of an “Unpopular Large Cap,” a term coined by Benjamin Graham for companies out of favor due to temporary challenges they face, in context to BTI they are declining cigarette volumes, government regulations, and the rise of ESG-friendly investments but in the end the company remains a cash-generating powerhouse, producing $13.07 billion in free cash flow and offering a robust dividend yield of 9.3%.

BTI has been in operation for over a century and it has a diversified portfolio of nicotine products, including well-known cigarette brands contributing roughly 80% of its revenue and reduced-risk products (RRPs) the remaining 20%. Even though global cigarette consumption peaked in 1977 and has been declining ever since the company’s pricing power has offset much of that impact. To counter this problem BTI has committed itself to invest in non-combustibles to sustain future growth prospects. While BTI's free cash flow growth has slowed to the low single digits its ability to maintain dividends and manage debt is impressive

The company generates half of its revenue from the U.S. while the other half from international markets as smoking remains prevalent in them thus positioning it well to benefit from any potential weakening of the dollar.

BTI’s industry’s regulatory environment has created high barriers to entry due to strict oversight, constant compliance, and limited advertising hence mitigating new entrants and safeguarding the market share of BTI. The tightening of regulations and increase in enforcement in the vape market could expand the customer base for tobacco companies like BTI.

BTI’s management has been paying down debt, reducing its net debt-to-EBITDA ratio from 5.8x in 2017 to 2.6x., initiating buybacks, and maintaining a steady dividend payout. BTI’s recent sale of its ITC stake has provided them funds for share repurchases, which should further enhance shareholder value.

Despite the market's negative sentiment towards the stock, the current price at which it is trading reflects a temporary mispricing rather than a fundamental weakness. BTI's low valuation—5.3x price-to-free-cash-flow—offers an attractive entry point. Even with no growth, the stock’s 10.5% shareholder yield ensures a strong return, making BTI a good investment with limited downside risk.