Is today’s British American Tobacco share price the FTSE 100’s biggest bargain?

The British American Tobacco share price crashed last year. Shareholder Christopher Ruane considers his position. Why is he still upbeat?

| 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.

Bus waiting in front of the London Stock Exchange on a sunny day.

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.

Some things in life just do not seem to make sense. For me, the share price of British American Tobacco (LSE: BATS) is one of them. I have been scratching my head wondering if my continued optimism in the firm’s outlook is misguided.

As an investor, it is always important to consider both sides of an investment case. It is too easy simply to ignore negative information. That can be a costly mistake.

The bear case

So what might explain the ongoing fall in the British American Tobacco share price? It dipped 32% last year and is 11% below where it stood five years ago.

A key concern is the long-term decline in demand for its core product, cigarettes. Indeed, the firm rattled the market badly last year when it announced it would take a £25bn write down in the value of key cigarette brands in the expectation that they would eventually be worth zero.

Along the way, there is an ongoing risk of further regulation and litigation affecting profitability. The company’s balance sheet is also debt-heavy. Adjusted net debt stood at £37bn at the half-year point.

One big problem

To summarise the bear case, I see two big concerns. The main one is that the company’s cash cow is in long-term decline and that is unlikely to change.

Yes, it can put up prices to offset declining volumes, but that can only work so far before it leads to further volume decline. After all, competitors may decide to lure the company’s customers by keeping their own prices lower.

Another concern is the debt pile. But I reckon that can actually be seen as part of the first challenge.

After all, if the company can keep generating the sorts of huge cash flows it currently does, then I do not think servicing the debt pile is as big an issue as it may initially seem. A lot of very savvy investors have been willing to let British American borrow large sums from them. I presume they expect to get it back with interest.

Why I’m optimistic

I am definitely not underestimating the significant risk of declining cigarette sales poses to the British American Tobacco share price. After all, the product remains the company’s key profit driver and that is highly unlikely to change in the near future.

But cigarette smoking has been declining in many markets for decades already. Despite that, cigarettes remain a huge and highly profitable market. I think the business could keep going for decades yet.

Meanwhile, non-cigarette forms of tobacco consumption like vaping are growing.

For now lots of small companies are trying to muscle in to this market. But I expect the long-term prize to go to companies that already have strong brands, developed distribution networks and deep experience of navigating the complex regulatory framework.

In other words, I think British American’s most profitable days could be ahead of it, not in the past.

That is not reflected in the double-digit dividend yield, among the highest of any FTSE 100 share, or the price-to-earnings ratio of just 6.

To my mind, British American Tobacco’s share price looks like it may be the FTSE 100’s biggest bargain. I plan to keep holding the shares and would happily buy more if I had spare cash to invest.

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.

C Ruane has positions in British American Tobacco P.l.c. 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

£20,000 in savings? Here’s how I’d aim to turn that into passive income of £903 a month

Our writer shares one approach to passive income investing, spotlighting a quality FTSE 100 stock he recently added to his…

Read more »

Investing Articles

Great dividend stocks! Here’s the forecast for Associated British Food shares to 2027

Associated British Foods' shares have dropped in value this year. Does this present a dip-buying opportunity for dividend investors to…

Read more »

Investing Articles

Should I sell my FTSE All-Share index fund and buy a S&P 500 tracker instead?

Harvey Jones is wondering whether now is a good time to invest more money in the S&P 500, after a…

Read more »

Investing Articles

Should I buy dirt-cheap BT shares after the recent pullback?

BT shares were on the up but now they're sliding again after the board trimmed full-year guidance. Now Harvey Jones…

Read more »

Investing Articles

Up 28%, can the easyJet share price keep rising?

The easyJet share price has gained altitude over one year but plunged over five. Is now an attractive time for…

Read more »

British Isles on nautical map
Investing Articles

Should I buy more BAE Systems shares at 1,350p?

BAE Systems shares have had a fantastic run since early 2022, yet still don't appear overvalued. Is it now time…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

7% yield and a cheap valuation! Is this one of the best shares to buy this month?

Christopher Ruane has been looking for cheap shares to buy. This one has a 7% dividend yield, so is it…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Should I buy National Grid shares for the big dividend before it’s too late?

This year's price weakness has left National Grid shares on what looks like a tempting valuation. I hope it doesn't…

Read more »