BATU: A cash cow or a pig waiting to be slaughtered?

It’s any investor’s dream to buy into a stock that will maximize his wealth. This is made possible by the dividends paid out by the company overtime and obviously the appreciation of its stock price. The dividends paid out depend entirely with the company’s dividend policy. As such, the company’s management determines on its own volition whether shareholders deserve a payout or not. On the other hand, the company’s quoted price on the stock market is normally dependent on a whole lot of factors one of them being the dividends paid out year on year. We could therefore argue that a company’s management can possibly massage a depressed stock by manipulating the dividends payout to possibly attract the ‘greedy’ investors on board who will in the end cause an upsurge of the price. Well, the only way to determine that there is no manipulation behind the curtains is to simply do a review of the books. The question is, ‘Is the payout fair vis-à-vis what the company can actually afford?’ 

BATU’s (British American Tobacco Uganda) shareholders took home a remarkable dividend payout amounting to Shs. 228 (Us$0.09) per share held for the financial year 2010, which effectively translates to 100% dividends paid out of profits. Superficially, it is such a generous token to shareholders. Fundamentally, even the smallest business owner is careful not to reward himself out of profits extravagantly as the business is bound to require capital input in future for expansion purposes. These retained earnings of a business are obviously the best means of expansion as they do not attract interest payments. BATU’s retained earnings in the financial year 2009 stood at a worrying Nil, however in 2010 the figure was reported to be a meager Shs.170 million. We could presume that BATU is not in dire need of expansion in future given the fact that it’s no longer internally manufacturing the leaf and has instead turned to exporting it. The move has since then turned out to be ingenious with a weakening shilling against the major currencies. It also meant that BATU had to sell off its surplus assets that were rendered idle after the decision. On this basis, we could probably okay the extravagant dividend payout.

On the flip side however are some quite disturbing facts. BATU reported a negative Shs. 38 billion as the cash flows for the financial year 2010, partly attributed to a Shs. 7.8 billion generous payout to shareholders. Attributing to the cash flow downside is also the reliance on bank borrowing and overdrafts to the tune of Shs. 40 to 50 billion year on year. It’s no rocket science to figure out that BATU is indeed incurring hefty interest charges and worst of all during a period when we are experiencing an upsurge in interest rates. Does such a disappointing performance guarantee the handsome dividend payout? Your guess should be as good as mine.

Well, history has it that tobacco and beer companies are always generous to their shareholders. Actually their pompous annual general meetings (AGM) tell it all. Most investors therefore have a natural liking for these stocks definitely due to the maximized return availed by them. However, in the event of a downside in performance these companies are bound to come hurtling like a rock down a cliff due to the weak fundamentals in place. In my view actually, BATU is not a cash cow but a pig waiting to be slaughtered.    


    Paul you write beautifully and make some of the most interesting linkages, I am impressed and I know you will continue to write some of the most insightful pieces going forward in 2012.
    As the year opens I thought I should tear apart this article of yours for the purpose of giving to you a side you might not have considered on this BATU stock:
    Depressed Stock: I don’t think so!
    Contrary to what you say that “company’s management can possibly massage a depressed stock by manipulating the dividends payout to possibly attract the ‘greedy’ investors on board who will in the end cause an upsurge of the price.”
    It is more than this otherwise the price could be as you mention because of ;(i) Free float- BATU ‘s shares and held as follows 90% (BAT International and a South African subsidiary of BAT International) so only 10% is free to trade on the Stock market, however of that we could only have 4% as Mr Sudhir R one of Uganda’s leading businessmen of Indian origin has over the years aggressively picked up BATU stock; This Sudhir BUY policy of BAT shares over the years should tell of something. Knowing prices are determined by Demand (in-part constrained by the Anti-Tobacco Lobby) and Supply (It is simply not there) you have a Stagnation of price; THEREFORE the only interested party in stock price who is acting upon that is Mr Sudhir; he is in the best position to tell you why he moves the price (Go interview him if you can)
    Also look out for Stock Earnings per share and the Price Earnings ratio

    ‘Is the payout fair vis-à-vis what the company can actually afford?’
    As from your words above, Fair! To know what fair from the shareholders’ point of view is very dependent on the business environment and in BATU case, (i) The anti Tobacco lobby mainly composed of ever increasing taxes on cigarettes have made it not viable for aggressive re-investment effectively turning Tobacco Cos. Into utility companies (servicing the habit) akin to railway cos or electricity cos which make huge infrastructure investments once in a long time
    (ii) Anti-Tobacco lobby has also led BAT Global and BATU to adopt a very rewarding internally cohesive incentive system: PAY shareholders 90% of earning so they re-invest elsewhere, PAY staff best salaries across board and Pay and look after your farmers well.
    On affordability vis a vis cashflows I will bring to your attention the fact that BATU has a single LEAF Buyer The parent company and also distributes products for a the Parent Co; recall in mid 200 when BATU shut down its manufacturing arm- The Parent co was there all the way- you cannot just cut off your supply source- by the way BATU has been made the LEAF growing centre of Excellence for Africa and the middle east, also the Head of Global Leaf is also MD BATU and sits here in Kampala.
    As you further analyse whether the Co. can afford they paid out 156/= per share interim dividend for the period Jan-June 2011, focus on the business model and not on the date record per se BAT Kenya adoptes the same 90% of dividends are paid out to the shareholders
    EXTRAVAGANT dividend payout! No SURVIVAL for the future for the respective Shareholders

    Cash flows and borrowings- that’s how well oiled machines work, the key for an agricultural trading company that BATU is- is Turnover, the reasonable margins cover interests, my guess therefore is that how such a business model is oiled and keeps moving; check out BATU year on year Sales
    Pompous- he he actually BATU’s AGM is the only one with all kinds of alcohol at a top hotel in Kampala- The Sheraton

    Rock off a Cliff
    The fundamentals of BATU and for that matter anyother Tobacco company are based on the consumers- if people stop smoking then your rock off the cliff will come into play, that is why when BATU Uganda had to shut down its manufacturing due to unreliable power and too much contraband (smuggled competing products) BAT Global pumped money and it is now a LEAF growing centre of Excellence. IN MY VIEW IT IS A CASH COW

  2. Hey Paul below I add some of the most passionate exchanges I have had with investors over this same stock

    One of the stocks we are following is the Agricultural export stock- British American Tobacco Uganda Company a major exporter of Tobacco leaf to her Global parent company BAT- it has the best dividends yield on the market averaging 15% per year of its the market price over the
    last 2 years (it paid out net 141/= per share for the period Jan-June 2011 to market price 1,300), and is on recovery as it has focused its business in Uganda on Agriculture only.

    For this reason it is not easy to get these shares and also the fact that only 5% of its shares are tradeable on the market;

    Tobacco Investment Reservations on investing in companies they consider not suitable to society,

    I can only justify personally as to why i invest in the BAT particularly;

    1. They have an over 100,000 farmer network whom they pay premium to grow Tobacco in Uganda- are uplifting communities in rural Uganda.

    2. Uganda's competitive advantage is in Agriculture, they are passing on world class agriculture technology to Ugandans and this also reminds me that a couple of years ago we Shareholders (been there since 2006) took on the company to allow farmers to intercrop- by growing other especially food crops besides tobacco (tobacco is premiumly priced and at one time led to a scarcity of food crops in west nile). Also Uganda is now the Leaf Growing excellence centre for Africa and the middle east now.

    3. They pay almost 30% of their revenue in taxes, gov'ts all over the world tax tobacco cos highly to curb citizens intake, in Uganda over the last 25 years they are always amongst the top 10 tax payers. BAT is good for gov't tax collection also they have excellent staff policy especially for the locals where they operate- they remunerate all their staff competitively

    4. Smoking, is a personal decision just like taking sugar water/soda Mac Donalds which is creating havoc in the developed world in terms of obesity and her repercussions, or beer companies which have developed a much better Public Relations systems, for me investing in a Beer company, Soda company, even Oil or mining companies that devastate the environments where they operate is same as BAT investment, all comes down to PR

    5, BAT Uganda has strong strategy going forward especially regarding her decision to limit her Uganda operations to Leaf growing.

    Quote, an Arab acquaintance who came to the Uganda market once told me when i asked him what he thought of BAT
    "The Tobacco lobby is ineffective because it goes for the messenger and not demand, for as long as the individual smokers don't stop, Tobacco companies returns will be like a beautiful girl in shabby clothes, the beer companies have only projected their image better but could be worse in terms of impact- that is why we don't allow alcohol in the Arab world"
    My intention is not to explain away the reservation, but just an alternative view

    Like actually now in Uganda, i think Britain just withheld Aid money because Uganda is hostile to people's rights (homosexuals) yet as in the developed world you would be viewed as an oppressor here in Uganda and greater Africa jailing a homosexual is seen guarding our morals

    PARADOX indeed

  3. @muhimbise Thank you for the feedback. Great to hear your side of the story...