British American Tobacco is in freefall! Time to buy, or to sell, this FTSE 100 dividend stock?

British American Tobacco plc (LON: BATS) is sinking again. Is it time to buy or bail out of the FTSE 100 (INDEXFTSE: UKX) tobacco titan?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If you hold shares in British American Tobacco (LSE: BATS), your week has hardly got off to the best of starts.

Its share price is down 9% in Monday trading as I type, exacerbating the downdraft that first set in almost 18 months ago. Today’s losses mean that the cigarettes manufacturer’s market value has just about halved since it hit record tops above £56 per share in June 2017.

Menthol in the mire?

The investment community has stormed the exits today after reports emerged of a fresh legislative attack on British American Tobacco and its traditional, combustible products.

According to a Wall Street Journal article published over the weekend, the US Food and Drug Administration (FDA) is proposing a ban on the sale of menthol cigarettes, a segment which account for more than one-third of total cigarette sales in the US, according to Barclays Capital.

The menthol market has long been criticised as particularly hazardous by anti-smoking advocates, and the Wall Street Journal cited a 2013 FDA report in its article which showed that such cigarettes are more addictive and more damaging to health than regular tobacco sticks.

Imperial Brands also saw its share price duck on Monday in reaction to the news. But the fall has been less devastating than that of British American Tobacco, as the latter relies much more on the menthol segment to drive the bottom line following the acquisition of Reynolds American and its Newport brand back in 2017.

According to Barclays Capital, British American Tobacco generates approximately 25% of total earnings from menthol. This compares with Imperial Brands, where menthol accounts for some 11% of total tobacco earnings.

Do 7% dividend yields make it a buy?

The start-of-week sell off has exacerbated British American Tobacco’s already-meagre valuation and right now it sports a forward P/E ratio of 10.2 times. Any figure around, or below, 10 times is usually considered extremely low (on paper, that is).

What may also be appealing to many investors is the size of the tobacco titan’s dividend yields. As I type, City analysts predict full-year dividends of 200.9p per share and 212.6p in 2018 and 2019, respectively, projections that yield an inflation-smashing 6.7% and 7.1%.

Neither its low P/E multiple nor its gigantic yields are enough to tempt me to invest, though. The proposed menthol ban which, according to Barclays Capital, could take around two years to implement, follows legislative action on the sale of standard cigarettes that continues to grow governing the sale, marketing and usage of tobacco goods across the globe.

But what’s really shaken investor confidence in the likes of British American Tobacco is the growing regulatory threat facing their so-called next generation products like e-cigarettes and thermal heating products, technologies that will need to thrive in order to offset the lost revenues from traditional tobacco products. Reports also suggest that FDA is also considering banning some sweet e-cig flavours in a sign of this growing trend.

I believe that, right now, the investment risks associated with British American Tobacco are far too high even despite the firm’s low valuations. And I fully expect its share price to continue sinking.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

US Stock

Here are the best-performing S&P 500 stocks after the US election result

Jon Smith notes some of the largest gainers from the S&P 500 yesterday and explains how the election result has…

Read more »

Growth Shares

2 UK stocks knocking on the door of promotion to the FTSE 100

Jon Smith points out a couple of UK stocks that he feels could be ready for the big league based…

Read more »

Investing Articles

Rolls-Royce shares just fell 7%. Is it time to buy?

This investor in Rolls-Royce shares takes a look at the FTSE 100 engine maker's trading update to see what caused…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

What’s going on with the Auto Trader share price?

Paul Summers takes a closer look at why the Auto Trader share price has tumbled despite the company posting higher…

Read more »

Investing Articles

Legal & General shares look set to give me a mind-blowing 10.22% yield in 2026!

Harvey Jones is getting a brilliant second income from his Legal & General shares and expects even more to come.…

Read more »

Investing Articles

I’d consider this beaten-down FTSE 100 dividend stock to target a second income of £19,000

Our writer sees an opportunity to earn a substantial second income by investing in this UK insurance giant. Here’s his…

Read more »

Investing Articles

How cheap is the 72p Vodafone share price?

The Vodafone share price looks very cheap having fallen to a 72p price tag. But is it really the bargain…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Up 43% in a year and the IAG share price could keep on rising!

One of the FTSE 100’s highest-flying stocks still looks cheap on an earnings basis. Is this a brilliant buy for…

Read more »