Jump to full article: Business Day (za), 2009-07-15
Author: Ben Temkin
Intro: We’re now looking at companies with sustainable, growing dividend yields.
British American Tobacco (BAT) is one of these. At its share price of R230, its historic earnings yield is 7,55% and its dividend yield is 3,83%. Many of its markets are flourishing. The global economic crisis could spur demand for more addiction.
We won’t buy the shares, however, because we don’t like the tobacco business.
Relative to my fear that Anglo will be in a takeover battle, I can’t resist telling you something about BAT in the role of a “white knight”. . . .
In 1986, I was offered the position as marketing director of Eagle Star’s offshore life insurance company based in the Isle of Man.
There I found, to my dismay, that BAT was the controlling company of Eagle Star. I had been so focused on the domestic market that I had missed the costly battle against Allianz. To win the battle and be free from the clutches of a larger competitor, Eagle Star had been grabbed by a death-dealing tobacco merchant. Could there have been a less suitable owner for a company that wanted its life insurance policyholders not to be lured into smoking tobacco?
The tobacco business is, comparative to life insurance, simple. You find a growing market for potential addicts, build a factory, make cigarettes, and the cash flows and flows. Building an insurance business, especially a life insurance business, requires capital and patience. It can often take years before profits emerge.
The last thing a tobacco company wants is to wait years for life insurance profits to emerge and have to back up the promise with additional capital. It also doesn’t enjoy the cyclical fortunes of short-term insurance business.
In the 1990s, the infant Eagle Star life company in Holland, which I then headed, was growing so rapidly that it was cash- starved. . . .
Inevitably, the unholy alliance with the “white knight” ended when Eagle Star’s larger rival, Zurich, bought the UK company from BAT. This ironic consequence says nothing about the years of pain and misery endured by Eagle Star’s management in trying to pursue a business strategy directly in conflict to that of the tobacco business.
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