The UK economy has been very unstable in recent times. It’s growing, but stubbornly slowly. Inflation is also declining more slowly than expected. This pressures households to be more frugal with their spending. All of this is bad for businesses and can result in a stock market crash.
However, there are some industries that thrive during poor economic conditions. While I don’t agree with it from a moral standpoint, tobacco is something that inevitably does well when this is the case.
One big player in this sector is British American Tobacco (LSE: BATS). Its shares have performed terribly in 2023, falling by 25%. However, it might be a great time to consider buying its shares.
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Challenges
British American Tobacco manufactures and sells tobacco, cigarettes, and other nicotine products. Popular brands such as Dunhill, Lucky Strike, and Vuse fall under its umbrella.
The tobacco industry faces some long-term challenges. Firstly, there has been a consistent decline in the number of smokers over the years. For example, only 11.2% of adults were regular smokers in 2022. This has fallen sharply from 45.6% in 1974.
Rishi Sunak has also created further headaches for the industry. He wants to raise the age of people who can buy cigarettes by a year every year so that eventually no one can buy tobacco.
Even though there is some opposition within his own party, this is likely to come into law, especially as Labour, the opposition party, is planning on voting for it.
This begs the question about why I believe British American Tobacco is a share to consider if the long-term prospects of its industry seem dire.
Well, I don’t actually believe it’s a great investment in the long run.
However, for investors who are looking to make a good return over the short to medium term, British American Tobacco definitely has some catalysts going for it.
Recession-resistant
When people are struggling with everyday living costs, as they are now, they get stressed. The sad reality is that this makes them more susceptible to smoking, as it can relieve this stress.
Smoking is also highly addictive. Therefore, we see that tobacco consumption remains consistent during times of economic hardship.
As a result, while many companies have seen their growth flatten or even decline, British American Tobacco saw its revenue increase by 4.4% year on year (yoy) in the last quarter.
Earnings growth
While the revenue growth looks nice, earnings growth of 113% yoy in the last quarter is very impressive. This shows that management is improving the operational efficiency of the company, which can hopefully keep profits consistently high over the next few years.
Despite this, British American Tobacco shares are trading at a rock-bottom valuation. With a price-to-earnings (P/E) ratio of six, this presents a potentially great entry point for investors.
This has also pushed the dividend yield up to 9.3%, making British American Tobacco shares a great way to generate some extra income.
Now what?
I personally wouldn’t invest in British American Tobacco myself. It faces tough market conditions in the long term and I ultimately don’t agree with the premise of its business.
However, I believe that over the short term, it has very strong fundamentals. In the event of a stock market crash, British American Tobacco shares are definitely worth considering.
