One reason many investors buy FTSE 100 shares is because they like the idea of owning a stake in a proven and well-performing business.
So it came as something of a surprise this week when one FTSE 100 share I own saw its share price drop to a 52-week low.
That pushed the yield up to almost 10% though. So I took the opportunity to buy more of the shares for my ISA. Let me explain why.
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Up in smoke
The share in question is Lucky Strike manufacturer British American Tobacco (LSE: BATS). Over five years, the FTSE 100 share has dropped by 14%. Since last summer though, it is down by more than a third.
Part of that is due to this week’s fall.
The company issued a trading statement that broadly struck a positive note. But it also contained a bombshell. Amid lesser points, the firm announced a £25bn writedown this year, primarily due to what the business perceives to be the long-term value of its US cigarette assets.
Understandable move, poor communication
That might not be as bad as it sounds at first sight. The writedown is an accounting one. It does not mean the business will have £25bn less cash, just that some assets will be carried at a much lower value on the balance sheet than before.
I think that probably makes sense, to be honest.
A key risk for tobacco companies including British American is an ongoing decline in cigarette use in many markets. Writing down the value of its US cigarette business simply reflects that ultimate reality. While revenues and profits may be on the way down, I think there could still be decades left of profitably flogging fags in the US.
What concerned me more about the announcement, in fact, was its suddenness. I think concern was also reflected in the City’s reaction of sharply marking the FTSE 100 share price down.
Better signalling would have helped ease the blow, in my view. The lack of that has made me question the judgement of the firm’s management.
Possible bargain
The chief executive did purchase shares in the firm on the day of the announcement. Seven in total, through a share purchase scheme!
However, another director bought a bigger number, paying from his own pocket. I also topped up my already sizeable British American holding on the day of the big announcement.
The risks are notable. Despite an ambitious push into alternatives, cigarettes continue to be the key sales and profit driver for the company. The expected decline in US demand could eventually turn out to be an existential risk for British American.
But it has been around for decades and navigated plenty of risks before.
I think its portfolio of premium brands has value and could be used in non-cigarette lines of business. Meanwhile, the business continues to throw off huge free cash flows and the shares yield 9.9%.
For a FTSE 100 share, that is unusually high – and motivated me to buy!
