I’d buy British American Tobacco today, despite its current difficulties

British American Tobacco plc (LON: BATS) faces an uncertain long-term future, but it will still be standing on solid ground for a while yet.

| 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.

British American Tobacco’s (LSE: BATS) share price is trading at tempting levels right now. Its average price in February is over 30% lower than the highest price level seen in the past year. In my view, as a FTSE 100 company with a long history, robust financials and captive demand, it’s a no-brainer that the time is still ripe to buy its shares.

However, the big question in my mind when researching this stock was: how long should investors hold it for? The trigger for the question is the small changes under way that will fundamentally alter the industry over time. Just as I wrote about the oil and gas industry as far as Royal Dutch Shell was concerned, changing consumer preferences and regulatory changes will push the tobacco industry into a tipping point as well.

Here at the Motley Fool, we are interested in investment opportunities that can hold you in good stead for the long term, so it is essential to assess what industry evolution means for tobacco majors like British American. My research indicates that it’s a good share to hold for the next few years, but the long-term future needs more consideration. Let me explain.

Regulatory wrangle

One factor sending the company’s share price down is the potential regulatory clampdown on menthol cigarettes by the US Food and Drug Administration (FDA). British American’s US market for menthols accounts for 25% of overall group profit, indicating a significant hit to the bottom line if the regulatory changes do go through. And electronic cigarettes might not be the safety net they seem. The FDA is also looking to limit the use of e-cigarettes, to curb consumption among young people.

The menthols situation will be challenged by tobacco producers and it could be a good few years before the ultimate outcome is determined. And on the question of smoking alternatives, it’s worth noting that relatively little revenue is presently generated from next-gen electronic products. Restricting their usage could even prolong dependence on traditional cigarettes, boosting the core strength of the company.

Positives to the rescue

For the foreseeable future, British American remains in a fairly strong position with a still-large cigarette market, I believe. It also has strong financials, with a year-on-year increase in both revenues and profits in 2017 (the last full year for which figures are available). It’s highly geographically diversified too, easing macro-economic risks that might come from a concentrated market. And we cannot ignore its highly attractive forward price/earnings ratio of 2.2x, way lower than that of its peers.

Making sense of the future

However, over the long term, the outlook is less clear. The outcome of regulatory changes and how far the company is able to gain share in the next-gen products market are still unknown. What we do know, is that it expects “a very significant percentage of the group revenue” will come from these products by 2030. At worst, therefore, it’s a wait and see and at best a positive long-term scenario. I would go ahead and buy.

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.

Manika Premsingh 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

Investing Articles

3 FTSE 100 shares with ex-dividend dates next week!

Fancy grabbing some juicy dividends in the coming weeks? These FTSE 100 shares all go ex-dividend during the next seven…

Read more »

Young Woman Drives Car With Dog in Back Seat
Investing Articles

Can the Tesla share price beat September’s 22% climb in October?

All the techie attention seems to have drifted away from the Tesla share price at the moment. But October could…

Read more »

Investing Articles

Up 27% yesterday, but I think my favourite growth stock under $10 still has room to run

Our writer looks at why up-and-coming growth stock Joby Aviation (NYSE:JOBY) just exploded 27% higher on the New York Stock…

Read more »

Investing Articles

1 stock I’d love to buy from the FTSE 100 in October

I think this FTSE 100 business has great potential to perform well long term and the valuation looks attractive to…

Read more »

Investing Articles

If I’d put £1,000 in Lloyds shares 5 years ago, here’s what I’d have now

Lloyds shares are among the most closely watched on the FTSE 100. The stock might not have delivered for investors…

Read more »

Investing Articles

Top UK shares I’d consider buying for growing dividends

Some UK shares have been super-reliable when it comes to throwing cash back at investors. Paul Summers picks out some…

Read more »

Investing Articles

After a bumper first half gives the Tesco share price a boost, should I buy?

The Tesco share price is having a great year, and these first-half figures show us why. Here's how the stock…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

Fear sends FTSE 100 stocks flashing red. But why are these two stocks winning?

The FTSE 100 continues to deliver a strong performance despite several stocks dipping earlier this week. Our writer looks at…

Read more »