/ JANUS HENDERSON / only make up a quarter of the company ’ s revenues while there remain questions over how quickly this might trend to zero over the long term . Also , the company is not standing still and has been increasing investment in research and development over the years (£ 850m spent in the last five years ). At its recent capital markets day , the company talked about its next generation EV battery technology , eLNO , to challenge the NMC batteries currently being used in EVs . With claims such as better ranges , power and life cycle at a lower cost it all sounded very encouraging . No doubt there is execution risk but historically the returns on the company ’ s investments have been in the high teens .
The advent of electric cars and the fears around the impact on business models reminds me of the concerns over how e-cigarettes and vaping could have changed the face of the tobacco industry . The tobacco companies reacted quickly , however , either buying up vaping start-ups or developing their own technologies . Although vaping continues to grow , it hasn ’ t proved to be the disruptive force that was initially predicted . Unfortunately , it couldn ’ t give the same nicotine hit as traditional cigarettes , the flavours weren ’ t the same and the handheld devices proved unsatisfactory for some to use . This has led to the tobacco companies to continue to invest , recognising the need to find suitable alternatives to combustible cigarettes given their structural decline over health risks .
British American Tobacco is at the forefront of developing the next generation of reduced risk tobacco products called heatnot-burn ( HNB ). The technology heats rather than burns tobacco to release a vapour with a taste similar to that of a conventional cigarette with significantly less toxicants . This gives the benefit over e-cigarettes of providing the same nicotine hit and flavour as a traditional cigarette . It also means that the same barriers to entry of supply and distribution remain for the big tobacco companies . Soon the product will evolve with the technology used to heat the tobacco stored within a filter , meaning the delivery mechanism will match the size and feel of a traditional cigarette .
Despite this investment and growth potential , British American Tobacco ’ s shares have been lacklustre against a strong market in 2017 . The valuation is attractive , with the company trading at a significant discount to the consumer staples sector and also offering investors a 4 per cent dividend yield which continues to grow .
As an income investor , it ’ s hard to own the disrupter . Those companies typically are in a growth phase and reinvest in their business rather than paying out dividends to shareholders . It ’ s important to remember , however , that management teams of the disrupted companies won ’ t necessarily stand still and the good ones will correctly balance investment to protect their businesses with dividends successfully .•
JOHNSON MATTHEY ’ S INVESTMENT
IN R & D VERSUS RETURNS £ m %
250 ROIC ( RHS ) R & D Spend
25
50
150
100
50
0
2013 2014 2015 2016 2017
Source : Company Accounts , 31 October 2017 Notes : R & D = Research & Development , ROIC = Return on Invested Capital
20
15
10
5
0
None of the above stock examples are to be taken as advice and are for illustrative purposes only Before investing in an investment trust referred to in this document , you should satisfy yourself as to its suitability and the risks involved , you may wish to consult a financial adviser . [ Past performance is not a guide to future performance ]. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested . [ Tax assumptions and reliefs depend upon an investor ’ s particular circumstances and may change if those circumstances or the law change ]. Nothing in this document is intended to or should be construed as advice . This document is not a recommendation to sell or purchase any investment . It does not form part of any contract for the sale or purchase of any investment . [ We may record telephone calls for our mutual protection , to improve customer service and for regulatory record keeping purposes . Issued in the UK by Janus Henderson Investors . Janus Henderson Investors is the name under which Janus Capital International Limited ( reg no . 3594615 ), Henderson Global Investors Limited ( reg . no . 906355 ), Henderson Investment Funds Limited ( reg . no . 2678531 ), AlphaGen Capital Limited ( reg . no . 962757 ), Henderson Equity Partners Limited ( reg . no . 2606646 ), ( each incorporated and registered in England and Wales with registered office at 201 Bishopsgate , London EC2M 3AE ) are authorised and regulated by the Financial Conduct Authority to provide investment products and services . © 2018 , Janus Henderson Investors . The name Janus Henderson Investors includes HGI Group Limited , Henderson Global Investors ( Brand Management ) Sarl and Janus International Holding LLC .
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