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On Tuesday, Goldman Sachs analyst Takashi Miyazaki upgraded Japan Tobacco Inc. (TYO:2914:JP) (OTC: JAPAY) stock rating from Neutral to Buy and increased the price target to JPY5,000 from JPY4,800. The upgrade is based on several key factors that suggest a positive outlook for the company’s financial performance. According to InvestingPro data, Japan Tobacco (OTC:JAPAF) maintains impressive gross profit margins of 55.3% and currently trades at a P/E ratio of 15.8x, with a market capitalization of $48.8 billion.
Miyazaki predicts a strong growth in adjusted operating profit for Japan Tobacco, with a compound annual growth rate (CAGR) of +4.5% from the fiscal year ending December 2025. Additionally, adjusted net profits are expected to see even more robust growth, with a projected 3-year CAGR of +6.1%. This anticipated increase in profits is attributed to various reasons, including lower trademark amortization costs. The company’s recent performance supports this outlook, with InvestingPro showing revenue growth of 10.9% in the last twelve months and an overall financial health score of "GREAT."
The analyst also forecasts a +6.1% 3-year CAGR for dividends, which is a critical metric for equity markets. Following a period of unchanged dividends in the fiscal year ending December 2024, the dividend is expected to rise in FY12/25, showing a year-over-year increase of +4.1%. InvestingPro data reveals that Japan Tobacco has maintained dividend payments for 30 consecutive years, with a current dividend yield of 3.25%.
Goldman Sachs believes that the improvement in free cash flow (FCF) over the next three years will support both the valuation of Japan Tobacco and the growth of its dividend. Despite the company’s share price having fallen 11% from its peak on June 11, 2024, underperforming compared to the market (TOPIX, which was up 1.0% over the same period), Miyazaki sees this as an opportunity. The decline in share price is partly attributed to concerns over the impact of a stronger yen on profits and the lack of a dividend hike.
The analyst’s outlook reflects confidence in Japan Tobacco’s financial health and potential for increased shareholder returns in the coming years.
In other recent news, JPMorgan has initiated coverage on Japan Tobacco, assigning it a Neutral rating. The firm has set a price target of ¥4,500, reflecting their assessment of the company’s current valuation and future prospects. Japan Tobacco is increasing its investments in the reduced-risk products segment, aiming to catch up with competitors after a delayed entry into this market. Despite the late start, JPMorgan expects Japan Tobacco’s profits to continue rising. The firm believes that the costs of these investments will be offset by steady income from the company’s traditional cigarette business. JPMorgan’s analysis suggests that Japan Tobacco’s shares do not appear undervalued based on dividend yield or price-to-earnings ratio metrics. This has led them to maintain a Neutral stance on the stock. These developments provide investors with insights into Japan Tobacco’s financial health and market position as it expands into the reduced-risk product space while sustaining its core business.
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