Is It Still Safe to Buy British American Tobacco?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market. However, many people are currently worried the market could be overheating. So right now I'm analyzing some of the most popular companies in the FTSE 100, hoping to establish whether they can continue to outperform in today's uncertain economy.

Today I'm looking at British American Tobacco (LSE: BATS  ) (NYSEMKT: BTI  ) to determine whether the shares are still safe to buy at 3,663 pence.

So, how's business going?
Investors have been pleased with British American's performance recently as the company has continued to grow its earnings despite changing opinions on tobacco worldwide.

In addition, while the total volume of cigarettes sold globally continues to fall, British American managed to increase the volume of cigarettes sold across its four key "global drive" brands by 1% in the first half of this year. Thanks to strategic price increases, the company's revenue expanded 5% in the same period.

Moreover, management remains proactive with regard to global smoking habits. CN Creative, a U.K. based e-cigarette technology company that currently has several e-cigarette products on the market. This diversification away from tobacco should help British American offset some of the losses owing to the general decline of cigarette consumption worldwide.

Expected growth
British American has steadily improved its earnings per share by an average of 11% a year since 2009, and the company is expected to continue this trend. Indeed, City analysts predict the company's earnings per share will be £2.30 for 2013 (11% growth) and £2.50 for 2014.

Shareholder returns
The tobacco sector as a whole is well-known for its generous shareholder returns, and it looks like British American will not break that trend anytime soon, either. The company has authorized a £1.5 billion share repurchase program for this year, and the full-year dividend payout is expected to be about £1.50 a share -- an increase of 11% from 2012.

However, British American's dividend yield is currently 3.6% -- much less than that of its only London-listed peer, Imperial Tobacco, which currently offers a dividend yield of 4.4%.

Valuation
On a historic P/E ratio of 19.2, British American trades at a premium to its peer Imperial, which trades at a P/E ratio of 11.9. That said, British American's P/E is about the same as international peer Philip Morris, which trades at a P/E of 18.

Foolish summary
Unfortunately, despite British American's stable outlook, the company currently looks overvalued compared to its peers. Additionally, the company's share price has gained 17% this year, which is 5% more than the FTSE 100 as a whole, making the company look slightly overbought.

So overall, I believe that British American Tobacco does not look safe to buy at 3,667 pence.

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