BATS – A Pound Cost Averaging Example

The basic idea behind pound-cost averaging is straightforward; the term simply refers to investing money in equal amounts at regular intervals.

One way to do this is with a lump sum that you’d prefer to invest gradually – for example, by taking £1,000 and investing £100 each month for 10 months.

Let me show you how . . .

BATS – A Pound Cost Averaging Example

BATS is the London stock exchange’s ticker symbol for British American Tobacco Plc. For simplicity’s sake, we will assume that our hypothetical investor did the following:

  • buying shares in BATS, on the first trading day of each month

  • starting on June 2nd 2008, for a period of 15 months

  • spending £1000 per purchase, which equals 15 subsequent share purchases
Our ‘unlucky’ investor – in order to show you the worst possible outcome – bought every time at the worst moment of each selected trading day, i.e. the investor paid the highest share price of the day, every time (Note: trading costs, etc have been excluded from this example).

So, here is what the purchases looked like …

As you can see, our hypothetical investor’s £1,000 bought more shares of BATS during the market’s decline (April – June 2009) and fewer shares when the share prices were higher.

The end result of all that buying is that our investor now owns 841 shares of British American Tobacco Plc, having paid £15,000 (excluding costs). Below you can see what our investor’s shareholding in British American Tobacco is currently worth, based on the latest share price.

Also shown is the total amount of all dividends received during the period taking into account the number of shares owned at payment date.

Total return is based on the appreciated value of our investor’s shareholding plus all dividends received so far.

The outcome is . . .

Not bad at all!

But it could have been much better, if our investor whould have reinvested their BATS dividends in more shares of British American Tobacco.

Would you have bought shares BATS in the midst of the downturn?

Unless you are a subscriber to our premium content, you would have difficulty to ascertain if and when BATS has been historically undervalued since 1998.

Backtesting shows, that once BATS share price was below £16.50 a share – which only happened for a few days during 2009 – its shares would have been truly historically undervalued. And at that stage we would have purchased the shares, either as a lump sum or in subsequent purchases, using pound cost averaging.

Don’t miss out next time when a dividend paying share is historically undervalued, subscribe to our dividend share valuation and financial strength databases.

What next

  • as part of our subscription services we compile Dividend Value Profiles of the companies we are following, a summary of which on British American Tobacco you can Access Here (updated until 30 April 2012).

  • Why dividend reinvestment works

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