Picture supply: Getty Pictures
Shares in tobacco group British American Tobacco (LSE: BATS) have fallen to a value of £30 because the firm’s 2024 outcomes have been printed on 13 February. That’s a drop of simply over 10%.
This FTSE 100 inventory has now given up a lot of the beneficial properties 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 take a look at some potential causes for BAT’s current share value droop.
One issue would 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, modifications to rules in Australia and tax insurance policies in Bangladesh are anticipated to contribute to a 2% fall in business cigarette volumes in 2025. That is anticipated to have an effect on British American too.
The large image hasn’t modified
The truth is that rules, excise duties, and lawsuits will all the time be a danger to the tobacco business.
Declining gross sales of conventional cigarettes are additionally more likely to proceed. But it surely’s value remembering it is a very massive and worthwhile enterprise.
British American bought 505bn cigarettes final yr, because of the enchantment of main manufacturers akin to Dunhill, Fortunate Strike, Rothmans, and Camel.
The corporate can also be one of many largest gamers in different types of nicotine supply. These embody 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. Nevertheless, they are saying it’s struggling vital misplaced gross sales because of the “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 may be faraway from the market, I feel it’s truthful to anticipate that BAT’s Vuse model would enhance its market share within the US.
BAT: a inventory to purchase?
This can be a enterprise the place it’s straightforward to recommend issues that would go mistaken. However these dangers aren’t secret. I feel they’re most likely mirrored within the share value.
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 nearly as good worth.
This determine (referred to as the free money stream yield) additionally tells me that BAT’s money technology comfortably covers its 8% dividend yield. This reduces the danger of a lower 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.
