Due to the Covid-19 market meltdown, there’s no shortage of value candidates in the FTSE 100 right now. That’s despite the fact that the FTSE 100 has jumped 125 points (2%) today.
BATS is in the FTSE 100’s bargain bin
British American Tobacco (LSE: BATS) is one FTSE 100 value share that I’ve written about repeatedly. It’s a huge, global business with a simple business model, loyal customers and strong cash flows. It’s also #1 in the world by cigarette sales and has been around for 118 years. Other than the ethical aspect of tobacco smoking, what’s not to like?
However, BATS shares have been on the slide for a while now. A month ago, the shares cost £29 apiece. At the market close on Wednesday, they sold for £26.3p, up 35.5p (1.4%) today. Thus, BATS shares have dived by almost a tenth (9.3%) since a month ago.
BATS is worth £6.1bn less, but why?
I’ll put this 9.3% one-month fall in the share price into context. Today, British American Tobacco is worth £59.5bn, placing it in the top ranks of FTSE 100 heavyweights. Yet, only one month ago, it was worth £65.6bn. In other words, the market value of the firm has declined by £6.1bn. That’s more than the entire market value of 31 of the individual members of the FTSE 100.
Furthermore, over the past 12 months, the shares have dipped 13.9%. Yet as recently as 15 January, they hit a 52-week high of £35.07. Then again, during the spring market meltdown, this FTSE 100 share hit a low of £23.62 (on 23 March).
Therefore, BATS shares are currently just 11.4% above their 52-week low of five months ago. This makes me suspect that Mr Market may be mispricing this FTSE 100 stalwart.
BATS is cheap in FTSE 100 terms
Thanks to recent share-price declines, British American Tobacco shares are getting further into value territory on fundamentals. Today, they trade on a price-to-earnings ratio of 9.5, for a tidy earnings yield of 10.5%. The current dividend yield of 8.04% is almost double that of the FTSE 100 as a whole.
Even better, the next quarterly dividend of 52.6p is still up for grabs. It will be paid on 12 November to shareholders as of 1 October. That’s 2% of today’s share price in cash, right there and then. And another 2% in the next quarter. And the next. And so on, until cigarettes get banned or everyone on Earth stops smoking.
But the business is doing just fine
One reason for a declining FTSE 100 share price might be a worrying fall in sales, profitability or cash flows. But the half-year results released on 31 July suggested to me that the firm was coping admirably with the coronavirus crisis.
To sum up, British American Tobacco is in pole position in a declining industry, but one with loyal (and addicted) customers. It’s committed to paying out 65% of its earnings in dividends, which is billions of pounds a year for decades. Thus, I’d buy this FTSE 100 share today to grab a share of this torrential cash bonanza!
