Shares in tobacco group British American Tobacco (LSE: BATS) have fallen to a price of £30 since the company’s 2024 results were published on 13 February. That’s a drop of just over 10%.
This FTSE 100 stock has now given up most of the gains made since 1 January, but the year is still young. British American shares are still up by 25% over 12 months.
I reckon it’s worth considering whether this dip could provide a buying opportunity to lock in an 8% dividend yield.
Should you invest £1,000 in British American Tobacco right now?
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Why the dip?
Let’s start with a look at some possible reasons for BAT’s recent share price slump.
One factor may be the news that the company has set aside £6.2bn relating to a class action lawsuit in Canada. This has been rumbling on for years but now seems to be nearing a settlement.
Elsewhere, changes to regulations in Australia and tax policies in Bangladesh are expected to contribute to a 2% fall in industry cigarette volumes in 2025. This is expected to affect British American too.
The big picture hasn’t changed
The reality is that regulations, excise duties, and lawsuits will always be a risk to the tobacco industry.
Declining sales of traditional cigarettes are also likely to continue. But it’s worth remembering this is a very large and profitable business.
British American sold 505bn cigarettes last year, thanks to the appeal of leading brands such as Dunhill, Lucky Strike, Rothmans, and Camel.
The company is also one of the largest players in other forms of nicotine delivery. These include vapes, oral and heated tobacco.
The only problem here is that British American’s vaping volumes also fell last year, dropping 5.9%.
Management say its vaping products have a 40% share of the world’s top vapour markets. However, they say it is suffering significant lost sales due to the “continued lack of enforcement of illegal flavoured and single-use products” in the US.
These “illicit” vapes are said to account for almost 70% of all US vaping sales.
The good news for British American is that enforcement seems to be tightening up. If more illegal vapes can be removed from the market, I think it’s fair to expect that BAT’s Vuse brand would increase its market share in the US.
BAT: a stock to buy?
This is a business where it’s easy to suggest things that could go wrong. But these risks aren’t secret. I think they are probably reflected in the share price.
In the meantime, it’s worth remembering that British American Tobacco is still a huge and highly profitable business.
The company generated £7.9bn of surplus cash last year. That’s equivalent to 12% of the current £67bn market cap. I would generally see this as good value.
This figure (known as the free cash flow yield) also tells me that BAT’s cash generation comfortably covers its 8% dividend yield. This reduces the risk of a cut to the payout.
These shares won’t be suitable for all investors. But I think British American Tobacco is worth considering as a cheap, high-yield share.
