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No smoke without fire as vulture fund quietly builds stake in BATS and IMPS

Kenneth Dart has been quietly building stakes in Britain's two listed companies - both of them deeply unfashionable stocks.

British American Tobacco PLC -

Tobacco, so they say, is a dying business.

Well, it is for many of its customers, anyway.

For its two UK-listed champions, British American Tobacco PLC (LON:BATS) and Imperial Brands PLC (LON:IMB) the tobacco business remains very lucrative.

The stocks have been known for decades as BATS and IMPS to their fans. That fan base may be diminishing as environmental, social and governance (ESG) issues become more prominent but hard-nosed investors who care not for ESG issues are still clambering aboard, among them Kenneth Dart, the secretive billionaire investor.

He has reportedly built stakes worth close to £5bn in BATS and IMPS through his Spring Mountain Investments fund.

Last week, investment vehicles (including Spring Mountain) based in the Cayman Islands, where Dart is based, announced they had increased their stake in BATS to 7.06% from 6.03% previously, which is still below the 11.06% owned by The Capital Group Companies, the Los Angeles-based investment management group that upped its take last week from 11.00%.

Dart is the third-largest shareholder on the BATS share register.

As for IMPS, Spring Mountain declared an interest in 3.19% of the tobacco company’s shares. Previously, it had a stake of less than 3%, which means it was not obliged to reveal the size of its stake.

The 3.19% stake puts Dart in the top 10 shareholders on IMPS’ register.

As contrarian investments go, Dart’s stake-building in the fags makers is fairly classic. Shares in BATS have fallen to 2,679p from 2,945p over the last year, woefully underperforming the FTSE 100.

BATS vs the FTSE

IMPS, meanwhile, has fallen to 1,508p from 1,648p a year ago and likewise has underperformed the market.

BATS has a price/earnings ratio (PER) of 9.67 and a dividend yield of 7.96% while IMPS trades on a PER of 8.64 and offers a dividend yield of 10.1%.

A single-figure PER is normally considered cheap but a dividend yield of 6.0% usually sets alarm bells ringing.

IMPS vs FTSE 100

Both companies are currently covering their dividend payments from retained earnings, and if the dividends are maintained then it will take about 14 years for Dart’s investment in BATS to pay for itself and 10 years for the IMPS punt to pay off, all of which will offset any capital loss he might suffer.

History suggests that Dart, who made his name with so-called “vulture funds” that buy up government bonds of heavily indebted countries in the expectation of a price uplift following a bond restructuring, will not sit idly by just collecting his dividends.

(Charts courtesy of the London Stock Exchange)

Quick facts: British American Tobacco PLC

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LSE:BATS

Price: 2658.5594 GBX

Market Cap: £61 billion

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