Recent Buy: Japan Tobacco

Welcome to our stock series, where I let you in on why a company has made it on our watchlist or even in our portfolio. This time, I focus on Japan Tobacco.

Japan_Tobacco_logo

On December 20, 2017 we bought 150 shares of Japanese company Japan Tobacco. At a price of €27.44 we paid €4,116.00 plus €10.29 in order fees.

What is Japan Tobacco?

Japan Tobacco – or JT for short – is one of the world’s largest tobacco businesses. The Tokyo-based company goes back to the 19th century, when Japan first introduced its tobacco monopoly. Today JT is famous for well-known brands just like Camel, Benson & Hedges or Winston. But it’s also active in pharmaceutical and processed food businesses, as shown in the graph below.

JT Business Segments
JT Business Segments

Just like the entire tobacco industry, JT is currently facing some major challenges. Advertising restrictions as well as an ongoing trend to an ever-healthier lifestyle hurt sales. Just visualize how few people are still smoking in the Western world nowadays.

However, the tobacco industry is also blessed with multiple growth opportunities. In addition to e-cigarettes and marijuana, there is still a lot of growth to be found outside the advanced economies. Cigarette sales in emerging markets might not be as profitable as in developed countries, but rapid population growth and a much higher rate of smoking promise a bright future for tobacco companies.

Why Japan Tobacco?

But could JT be a potential candidate for our portfolio? That I want to show you based on our stock screener. So, let’s go!

How cheap is JT?

I think a company’s stock is cheap if its current price-earnings ratio (PER) is lower than its average PER (since 2004). In case of JT, current PER is sitting at 15.1. This is less than its average PER of 15.8.

JT Factor 1
JT Factor 1

Therefore, JT’s shares are currently slightly cheaper than usual. I reward this fact with 0.2 bonus points.

How strong is JT?

I think a company is strong if it’s able to increase its profits both long-term (since 2004) and medium-term (since 2011). In case of JT, the lower of the two growth rates is 8.9% p.a. The company’s medium and long-term earnings growth is obviously quite high.

JT Factor 2
JT Factor 2

Therefore, JT seems to be a very strong company. I reward this fact with another 8.9 bonus points.

How robust is JT?

I think a company is robust if it’s able to continuously increase its profits over the long term (since 2004). In case of JT, the maximum year-on-year drop in profits was 48.3% (fiscal year 2008/09). However, the company didn’t report any loss over the entire valuation period.

JT Factor 3
JT Factor 3

Therefore, JT seems to be a reasonably robust company. I grant 7.8 minus points.

Is JT currently a bargain?

I think a company is a bargain if its long-term trend in earnings growth (since 2004) justifies its current PER. In case of JT, due to its robustness I would allow a PER of 13.2. This is less than its current PER (15.1).

JT Factor 4
JT Factor 4

Therefore, JT’s stock does not seem to be a real bargain now. I grant another 11.0 minus points.

Jung in Rente Score

To calculate my personal valuation metric – the so-called “Jung in Rente” score (JiR score) – I finally sum up a company’s bonus and minus points. In case of JT, that leads to a JiR score of -9.6 points.

JT Jung in Rente score
JT Jung in Rente score

Companies with a JiR score of less than -10 rarely make it on our watchlist, let alone our portfolio. With a JiR score of -10 or higher a stock qualifies itself for deeper analysis. A JiR score of 10 or higher is seen as a buy signal.

According to my valuation metric JT has scored -9.6 points and thus is worth to be considered.

Dividends

Apart from our JiR score, I also consider a company’s dividend policy. That’s why, before every purchase, I not only check the current dividend yield but also have a look at the dividend growth rate and dividend track record as well as the payout ratio.

JT Dividends
JT Dividends

Up until now, JT pursued a very investor-friendly dividend policy. The Japanese company has increased its dividend year after year over the entire valuation period. At present, JT pays out about 55% of its earnings, which is equal to a dividend yield of 3.6% considering my purchase price. If analysts’ estimates hold true, my yield should increase to 4.1% by next year.

Conclusion

Due to its stable business model as well as its investor-friendly dividend policy Japan Tobacco already made it in my watchlist a few months back.

With a 52-week low (€27.07) in sight and the ex-dividend date (December 27) coming closer by the minute, I decided to add Japan Tobacco to my portfolio even without an evident buy signal.

My purchase of 150 shares of Japan Tobacco provides me with an additional passive income of more than €150 per year.

What do you think about investing in tobacco stocks and Japan Tobacco in particular? Please let me know and leave a short comment or contact me on Facebook or Twitter!

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