Is the British American Tobacco (BAT) share price NOW too cheap to miss?

The BAT share price has sunk again after another chilly market update. But is the company now a brilliant bargain buy for FTSE 100 investors?

| 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.

Middle-aged white man pulling an aggrieved face while looking at a screen

Image source: Getty Images

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.

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.

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 British American Tobacco P.l.c. 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

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »