Is the British American Tobacco share price too good to pass on?

This Fool is on the lookout for value shares. At its current share price, could British American Tobacco be a smart buy?

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After taking a 21.6% hit in the last 12 months, I’m contemplating whether the British American Tobacco (LSE: BATS) share price is now too cheap to ignore.

I already own the stock. But as an investor who is always on the search for value shares, I’m wondering if the tobacco stalwart is one of the FTSE 100’s best bargains right now.

Its share price jumped following the release of its full-year results on 8 February. Could this be the start of a rally?

What caused the jump?

I’m intrigued to find out what had investors so excited. So, let’s take a look.

The business has been promoting its New Categories business in recent times. And the success of this in 2023 seems to be what has the market bullish on the stock. For the year, sales for this division rose 16% to £3.4bn. Last year marked the first time New Categories turned a profit. That’s two years ahead of target. Impressive.

Time to give back?

On top of that, there was another part of the release that grabbed my attention. That was CEO Tadeu Marroco alluding to the firm’s stake in ITC, India’s largest cigarette manufacturer, and the potential for a partial sale of its near 30% stake.

That would offer the business “the opportunity to release and reallocate some capital”. It seems likely that it would be used to give back to shareholders via share buybacks.

As a shareholder, that’s the sort of news I like to see. The firm already currently offers a dividend yield of 9.6%. Last year saw it bump its dividend by 2% to 235.52p per share.

A major hurdle?

So, that’s all positive news. But there is one issue. The company operates in an industry that’s faced massive scrutiny.

Granted, British American Tobacco has made a great push to veer away from traditional products. But it still relies on them for the bulk of its revenues. 81%, or 555 billion cigarettes, to be precise. And with governments and activist groups across the world pushing for a ‘smoke-free’ society, pressure on the business is mounting. These days, many ESG (environmental, social, governance)-focused investors shun stocks that promote habits such as smoking.

The impact of smoking’s falling popularity could be seen in its latest report. Where previously it was stated that cigarette brands such as Newport were expected to have an indefinite life, British American Tobacco now predicts these brands to have “a useful economic life not exceeding 30 years”.

Too good to pass?

But even so, at the current price, I’m tempted to buy some more shares. It’s no secret that the firm will have to adapt in the years ahead. However, the progress seen in New Categories fills me with confidence that the business can thrive in a ‘smoke-free’ world. It has made a strong start to this with its ‘A Better Tomorrow’ strategy launched back in 2020.

At a beatdown price with a yield only topped by two other companies on the FTSE 100, if I had the cash right now I’d happily add to my position today.

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.

Charlie Keough 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.

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