British American Tobacco (LSE: BATS) stock regularly has a habit of turning my head. Why wouldn’t it? It’s almost permanently cheap — even more so after falling 18% in six months — and next year’s forecast dividend yield is a mighty 9.1%.
That’s the sort of inflation-busting income I could use to offset my rising bills. Or sprinkle around my portfolio to fuel further growth.
But should I take the risk with this FTSE 100 stock?
Strong results
For the six months to 30 June, the company reported a 2.6% rise in revenue over last year. Meanwhile, adjusted operating profit rose 3.6% and adjusted earnings per share jumped 5.3%.
Impressively, revenue from its New Category segment (vaping and oral tobacco) rose 27%.
All this means the firm’s cash flow easily covers the forecast 9.1% dividend yield. The payout has grown at a compound rate of 17% over the last few years, which is mightily impressive.
That said, the firm’s net debt at £38bn is arguably a tad high.
More regulation?
A recent YouGov study found that experimental vaping among 11 to 17 year-olds in Britain rose from 5.6% in 2014 to 11.6% in 2023. That’s despite it being illegal for retailers to sell e-cigarettes or e-liquids to under-18s.
Maybe this increase isn’t too surprising. After all, those fruity flavours — such as pink lemonade and strawberry watermelon bubblegum — often seem more suited to a sweet shop than one selling e-cigarettes. And vaping is much more affordable than smoking.
But while less harmful than cigarettes, some scientific research suggests vaping might be bad for the lungs and heart. So, it’s also unsurprising to see it attracting more regulatory scrutiny, both in the UK and overseas.
I’d imagine this will continue, which could eventually start to put pressure on the category’s growth.
Will the shares drift westwards?
British American has been listed in London for over a century. But the company has recently been under pressure from some large shareholders to switch its primary listing to the US.
There, it’s argued, the firm would garner a higher valuation and attract more attention in its largest market.
However, Tadeu Marroco, the firm’s new chief executive, has dismissed these calls. He’s argued, rightly I think, that a move stateside doesn’t automatically guarantee a higher valuation.
Given the low P/E multiple of 7 though, I doubt we’ve heard the last of such calls to switch the listing.
Are the shares worth the risk?
British American owns some incredibly strong cigarette brands such as Lucky Strike and Dunhill. And its flagship Vuse product is now the world’s most popular vaping brand. I expect big profits to continue for some time.
But I don’t think the shares are worth the risk. Regulatory scrutiny and increased taxation of its smokeless products looks set to increase.
Plus, I’d highlight that the firm paid a $635m fine to US authorities this year after a subsidiary illicitly sold tobacco in North Korea and admitted bank fraud. Though that occurred between 2007 and 2017, it still doesn’t fill me with confidence.
Finally, I reckon the global tobacco market might well go the way of the dinosaurs over the next couple of decades. So, I’d rather invest my money elsewhere.
