Regulation 28 of the Pension Fund Act limits South African investors to holding no more than 30% of their retirement assets offshore. This is a less-than-ideal situation given the local market accounts for only around 1% of the global equity market. Fortunately however, we do have several dual-listed shares on the JSE that don’t count towards this 30%. Among these companies offering exposure to the global economy, our current favourite is British American Tobacco (BAT), due to its attractive valuation and exceptional history of profitability.
‘Rand hedges’ is the term often used to refer to dual-listed companies that earn most of their revenue offshore, such as BAT, Anheuser Busch and Richemont. Some also view resource stocks as rand hedges, but in our view, these companies’ fortunes are closely linked to those of South Africa. In general, low commodity prices are a driver of rand weakness, so such companies tend to underperform during periods of currency depreciation.
Among the companies that offer returns genuinely uncorrelated to the South African economy, our preferred choice at the moment is BAT, which offers attractive exposure to global consumers, with a tilt towards the US, the world’s largest and most profitable cigarette market.
Over the past 17 years, BAT has delivered more than 13% compound annual dividend growth in British pounds, increasing its dividend every year this century. This illustrates its ability to continually improve margins through operating efficiencies and market share gains, despite industry volume declines.
The group has completed the purchase of US business Reynolds International, which shifts its exposure towards a more profitable, less competitive market where it’s also the clear leader in the vaping space. US tax cuts provide an additional boost to future profits.
The next step for BAT is the move towards next-generation products (NGPs), including vaping and heat-not-burn products that offer customers their nicotine fix with a 95% reduction in harmful chemicals. Management expects NGPs to account for almost a fifth of group revenue in the next five years.
BARRIERS TO ENTRY
The group’s global scale in both distribution and manufacturing, coupled with its leading technology, position it well to migrate a large proportion of its cigarette customers to NGPs over the coming decade. In an industry where advertising is largely prohibited, BAT’s strong existing brands provide high barriers to entry.
Despite this, the market has lost its enthusiasm for ‘boring’ consumer staples companies in recent months as US bond yields have risen, reducing the relative attractiveness of such companies’ dividends. We see this as overdone.
In our view, BAT’s return on equity of more than 60% justifies a higher valuation than the current 14 times forward earnings, given the excellent conversion of accounting profits into cash. We expect earnings per share to grow by 9% per year in pounds for the next three years.
BAT trades at a free cash flow yield of more than 7% and offers a dividend yield of around 4.5% in pounds. This is attractive relative to the group’s own history, its tobacco peers and global consumer staples peers.
We can assist you with
Discretionary investment management
Sanlam Private Wealth manages a comprehensive range of multi-asset (balanced) and equity portfolios across different risk categories.
Our team of world-class professionals can design a personalised offshore investment strategy to help diversify your portfolio.
Our customised Shariah portfolios combine our investment expertise with the wisdom of an independent Shariah board comprising senior Ulama.
Outsourced investment service
We collaborate with third-party providers to offer collective investments, private equity, hedge funds and structured products.
Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.