Picture supply: Getty Photos
Shares in tobacco group British American Tobacco (LSE: BATS) have fallen to a worth of £30 for the reason that firm’s 2024 outcomes have been revealed on 13 February. That’s a drop of simply over 10%.
This FTSE 100 inventory has now given up a lot of the positive factors made since 1 January, however the yr remains to be younger. British American shares are nonetheless up by 25% over 12 months.
I reckon it’s value contemplating whether or not this dip might present a shopping for alternative to lock in an 8% dividend yield.
Why the dip?
Let’s begin with a have a look at some doable causes for BAT’s current share worth droop.
One issue will be the information that the corporate has put aside £6.2bn referring to a category motion lawsuit in Canada. This has been rumbling on for years however now appears to be nearing a settlement.
Elsewhere, adjustments to rules in Australia and tax insurance policies in Bangladesh are anticipated to contribute to a 2% fall in trade cigarette volumes in 2025. That is anticipated to have an effect on British American too.
The massive image hasn’t modified
The fact is that rules, excise duties, and lawsuits will all the time be a threat to the tobacco trade.
Declining gross sales of conventional cigarettes are additionally more likely to proceed. Nevertheless it’s value remembering it is a very giant and worthwhile enterprise.
British American bought 505bn cigarettes final yr, due to the attraction of main manufacturers comparable to Dunhill, Fortunate Strike, Rothmans, and Camel.
The corporate can be one of many largest gamers in different types of nicotine supply. These embrace vapes, oral and heated tobacco.
The one downside right here is that British American’s vaping volumes additionally fell final yr, dropping 5.9%.
Administration say its vaping merchandise have a 40% share of the world’s prime vapour markets. Nonetheless, they are saying it’s struggling vital misplaced gross sales as a result of “continued lack of enforcement of unlawful flavoured and single-use merchandise” within the US.
These “illicit” vapes are stated to account for nearly 70% of all US vaping gross sales.
The excellent news for British American is that enforcement appears to be tightening up. If extra unlawful vapes might be faraway from the market, I feel it’s honest to anticipate that BAT’s Vuse model would improve its market share within the US.
BAT: a inventory to purchase?
This can be a enterprise the place it’s simple to recommend issues that might go incorrect. However these dangers aren’t secret. I feel they’re most likely mirrored within the share worth.
Within the meantime, it’s value remembering that British American Tobacco remains to be an enormous and extremely worthwhile enterprise.
The corporate generated £7.9bn of surplus money final yr. That’s equal to 12% of the present £67bn market cap. I might usually see this pretty much as good worth.
This determine (referred to as the free money movement yield) additionally tells me that BAT’s money technology comfortably covers its 8% dividend yield. This reduces the danger of a reduce to the payout.
These shares gained’t be appropriate for all traders. However I feel British American Tobacco is value contemplating as an affordable, high-yield share.
