If the long-run return on the market is 9.4% (as researchers at Credit Suisse say), investing in shares should be a no-brainer. Somehow, however, all too often our portfolios don't seem to reflect that attractive performance.
This is partly because that 9.4% number is an average derived from 100 years of data. Picking various time periods within that 100 years gives very different outcomes -- and the market almost never actually returns 9.4% in any single year.
Needless to say, unless you're holding a market tracker, your portfolio could have dramatically different results than what the market experiences. If you own a disproportionate amount of winning shares, your returns could be significantly better than the market. On the other hand...
In this series of articles, I'm looking at how individual shares have performed against the FTSE 100 (UKX) during the past 10 years. Today, I'm assessing cigarette vendor British American Tobacco (LSE: BATS) (NYSE: BTI.US) -- whose business, interestingly, is derived almost exclusively from markets outside Britain and America.
Over the last decade, British American Tobacco's performance has trounced that of the FTSE 100.
Source: S&P Capital IQ
Since January 2003, British American Tobacco's shares have had an impressive average annual return of 24% -- far outstripping the FTSE 100's 9.5% annual average (these return calculations assume dividends were reinvested). When looking to outperform the larger market, it obviously helps to shake off fears of significant litigation expenses. Growing your dividend an average of 14% per year doesn't hurt, either.
Of course, one of the side effects of a rapidly rising share price is often an expanding price-to-earnings (P/E) multiple, which we see from the table below has been the case for British American Tobacco over the past three years. The company's P/E is currently near 20, which is well above that of the FTSE 100 of 12.1. In fact, the current multiple is near its 10-year high and well above the market's average of 13.4 over the past 10 years.
Source: S&P Capital IQ and Thomson Reuters
While there are attractive elements to a business that sells high-margin, addictive products (putting aside from any ethical qualms you may have) like pricing power and strong, growing cash flows. Fortunately for shareholders, British American Tobacco likes to share these cash flows with investors and its 4.1% dividend yield is quite attractive in today's market.
However, investors need to ask themselves if they are willing to pay historically high prices for a company that is facing pressure from cash-strapped governments as well as growing consciousness among consumers about the health consequences of its products.
British American Tobacco's strong presence in many emerging markets gives it better growth prospects than Imperial Tobacco (LSE: IMT), which has much more exposure to the developed markets of Europe, but the tobacco industry as a whole doesn't exactly have a high-growth runway in front of it.
Large caps for the long run
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