The British American Tobacco (LSE:BATS) share price has plunged again in Wednesday trading. Down 7.5% in midweek trading (6 December), the FTSE 100 company has now lost a third of its value during the past 12 months.
Tobacco stocks face considerable uncertainty as the fight to phase out cigarettes heats up. However, I’m considering whether the risk posed by regulators is now reflected in the company’s low valuation.
At £23 per share, BAT shares now trade on a forward price-to-earnings (P/E) ratio of 6 times. This is well below the Footsie corresponding average of 12 times.
As a bonus, the tobacco titan also boasts an eye-popping forward dividend yield. At 10.4%, this sails past the 3.9% average for UK blue-chip shares.
So what has caused the share price to plunge again? And should I buy it for my investment portfolio?
Triple trouble
The slow decline of the tobacco industry has been well publicised for more than a decade. And on Wednesday, British American delivered a triple-whammy that underlines the scale to which this once-booming industry is fading.
To begin with, BAT announced it was writing down the value of its US brands like Lucky Strike and Newport by a whopping £25bn. It said this was due to the impact of macroeconomic conditions and the huge popularity of “illicit modern disposables”.
The company would now assess the “useful economic lives” of its US cigarette portfolio, and in January plans to amortise the likely value of these brands over a 30-year period.
The FTSE firm also said that it expects sales this year to come in at the lower end of guidance. It has tipped organic revenues growth of 3% to 5% for 2023.
Meanwhile, for 2024 it noted that “we now expect growth in revenue and adjusted profit from operations of low-single digit on an organic basis at constant rates.”
Non-combustibles light up
Broadly speaking, this was a pretty terrible update from the FTSE firm. However, optimists will take some comfort from news of better-than-expected trading at its non-combustibles unit.
The division — which houses its flagship glo tobacco heated product (THP) — is now expected to “broadly breakeven” this year, two years ahead of target.
BAT said that it now intends to become “a predominantly smokeless business, with 50% of our revenue [coming] from non-combustibles by 2035.” It plans to ramp up investment in its THP unit in 2024 to meet this goal.
Getting stubbed out
The share price has collapsed during the past five years. And Wednesday’s fresh break below £23 means it’s trading at its cheapest since early 2011.
I find it difficult to see the company breaking out of this long-term downtrend. On the plus side, its non-combustible products are performing well. And they have a massive addressable market for British American to exploit. It estimates that just 10% of the world’s 1bn smokers use THPs or vapes.
However, the sharp decline of its traditional business continues to outweigh any success it’s having here. The company makes just 12% of group sales from its next-generation products. And an accelerating clampdown on the use, sale and advertising of vapes and similar technologies casts a shadow over future growth.
For this reason I’m happy to ignore British American despite its cheap valuation and buy other value stocks.