Has Covid-19 put another nail in this FTSE 100 dividend stock’s coffin?

The FTSE 100 provides many opportunities for investors to go bargain hunting. But Royston Wild reckons this particular blue-chip is best avoided.

| 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.

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.

We’re now a couple of months on since the coronavirus outbreak put the world on lockdown and shook financial markets. It’s too soon to predict with any accuracy the long-term changes global citizens will have to adopt. However, it’s clear that some FTSE 100 stocks stand to suffer considerably in a post-pandemic landscape.

One of these potential casualties is British American Tobacco (LSE: BATS). Why? Well, data suggests the number of smokers jacking in the habit has ballooned on the advice of health experts.

A joint study from YouGov and campaign group Action on Smoking and Health (ASH) suggests 300,000 smokers have tried to stub out for good during the crisis. A further 2.4m have cut down on the number of cigarettes they use too.

That comes amid claims smokers are more prone to initial infection and suffer difficulties during recovery. It follows comments from health secretary Matt Hancock, who recently claimed: “It is abundantly clear that smoking makes the impact of a coronavirus worse.”

Sales to slip

Global cigarette demand has been in a state of serious decline for years now. A ratcheting up of restrictions on the marketing, the sale, and the usage of tobacco products by governments the world over has smashed their grip on the general public. By the signs of it, the pandemic has stepped up the plight of Big Tobacco to a considerable degree. Not just in Britain, but across the world.

The likes of Footsie-quoted British American Tobacco aren’t quite in panic mode. Last week, BAT claimed it had made “a strong start to the year.” Volumes had grown amid a rise in both trade and consumer stocks, while a positive price mix has bolstered revenues too.

Don’t break out the bunting just yet. There’s a strong suggestion sales have surged in recent weeks due to panicked stockpiling by die-hard smokers. British American Tobacco said trade and consumer stocks are expected to reduce in the second quarter, crimping both industry volumes and sales growth in the period.

It’s clear the FTSE 100 colossus expects sales to tail off from the recent spike. That’s why it cut both its estimates for adjusted revenues and volumes (stick volumes are now expected to drop 5% in 2020).

Screen of price moves in the FTSE 100

A FTSE 100 stock I’d avoid

But is the Footsie firm worth the risk at current prices? British American Tobacco’s shares certainly look cheap on paper. At current prices, the tobacco titan changes hands on a price-to-earnings (P/E) ratio of 8.8 times for 2020.

It’s in the dividend stakes the company might attract the most attention though. Amid a sea of payout cuts from UK blue-chips, this particular mega-cap plans to keep on doling out dividends this year. And, based on current City predictions, this creates a bulky 7.4% yield.

I’m not tempted to buy by either of these readings though. British American Tobacco’s long-term outlook was looking pretty fragile even before the coronavirus crisis struck. Its earnings picture now looks flakier than ever. I’d much rather go bargain hunting elsewhere on the FTSE 100.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Should I follow Warren Buffett and sell my favourite shares?

Billionaire US investor Warren Buffett has been selling tons of Apple shares and other stocks of businesses he thinks are…

Read more »

Investing Articles

As like-for-like sales continue to fall, is the B&M European Value Retail SA (LSE:BME) share price a bargain?

B&M European Value Retail is known for its low prices, but could growing like-for-like sales make the share price the…

Read more »

Illustration of flames over a black background
Investing Articles

After rocketing 232% in a year can this red-hot FTSE 250 stock keep going gangbusters?

Harvey Jones says this FTSE 250 stock's on fire after smashing the index over the last year. It's cheaper than…

Read more »

Investing Articles

The Burberry share price has jumped 15% this morning! Time to pile in?

Harvey Jones was thrilled to wake up this morning and find the Burberry share price flying, but he's still sitting…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

At a bargain-basement price now, is it time for me to buy this 8%-yielding FTSE 250 media stock?

Shares in this FTSE 250 broadcasting firm continued their recent decline after the latest results release, leaving them looking an…

Read more »

Investing For Beginners

Here’s what a landmark legal ruling could mean for the Lloyds share price

Jon Smith mulls over whether issues with historical motor finance commissions could spell trouble for the Lloyds share price into…

Read more »

Investing Articles

I’d buy 4,186 Legal & General shares to aim for £14,616 a year in passive income

A relatively small sum invested in Legal & General shares can be transformed into much bigger passive income over time…

Read more »