It’s been an underwhelming year for the British American Tobacco (LSE: BATS) share price. On 6 December this form continued as shares in the tobacco powerhouse fell a further 5.93%. In the last 12 months, they’ve been pulled back a whopping 31.4%. Yesterday they hit lows not seen since 2011.
I own a small number of shares in the company. But this decline has me wondering. Should I be loading up on some more or should I be rushing to sell?
Why the fall?
First, let’s explore the catalyst behind this collapse.
On Wednesday, British American delivered an update to investors. Overall, the outlook wasn’t great.
In the release, the business announced it was to write down the value of some of its US cigarette brands by £25bn — including Lucky Stripe and Newport — due to economic headwinds impacting sales. On top of that, “illicit modern disposables”, such as disposable vapes, had also hit the sales of some of its major brands.
This impairment cost was a reminder of the flagging popularity of the tobacco industry. We’ve seen this in recent times as governments across the world continue to push for the eradication of smoking.
As a result, the firm now expects group organic revenue this year to come in at the lower end of its 3%-5% guidance.
Light at the end of the tunnel?
So, this clearly isn’t good news. But I’m a sucker for a bargain. And that has me wondering if now is a smart time to swoop.
To be fair, the stock looks cheap. It trades on a price-to-earnings ratio of just six. That’s half the average of its FTSE 100 peers.
On top of that, I always look to generate income with my investments. And I must admit, a dividend yield of 9.7% is enticing. There are only two companies on the Footsie that offer a higher payout.
The business is also diversifying through non-cigarette income streams. And while its update spooked investors, it did offer a small glimmer of hope.
CEO Tadeu Marroco said the writedown was in line with the firm’s plans to build a smokeless world. As part of this, it aims to generate 50% of its revenues from nicotine alternatives by 2035.
Its New Categories division, which includes products such as modern oral and tobacco heating products, now expects to “broadly breakeven” this year, two years ahead of the firm’s original target. This shows it’s making good progress. On the back of that, it plans to increase its investment in this area in 2024.
A rare opportunity?
So, is this decline a chance to buy?
Well, it may be, but I won’t be buying the shares today. The firm’s latest update is a stark reminder of the flagging popularity of the industry. While I do see large growth opportunities for its New Categories business, I’m waiting to see how its investment plays out before I decide to increase my position.
I’m happy with the exposure I have to British American Tobacco right now. The income I’ll receive is a nice bonus as I consider my next move.
