Is the British American Tobacco (BATS) share price too cheap?

The British American Tobacco (BATS) share price continues to fall despite rising profits. Zaven Boyrazian asks is this a buying opportunity?

| 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.

sdf

The British American Tobacco (LSE:BATS) share price had a bit of a rough journey throughout 2020. Overall, it fell by 20% last year, despite operating profits actually increasing. And while the stock has since moved up slightly, it’s still trading firmly below pre-pandemic levels. So, is this a buying opportunity for my portfolio?

The falling British American Tobacco share price

In 2020 there were rightful concerns about the firm’s ability to continue selling its tobacco-based products when consumer spending was falling rapidly. Fortunately, these fears proved to be unfounded. Why? Because British American Tobacco’s products are pretty popular with its customers. And so overall revenue in 2020 remained basically flat. But due to operational efficiency improvements, margins increased, leading to a 10.5% rise in underlying profits.

This is undoubtedly good news. And is why the management team was able to increase shareholder dividends last year. By contrast, most other businesses were either cutting. or outright cancelling, them. So why’s the BATS share price still slumping?

Last week, a report came out indicating the Biden administration is exploring the potential introduction of nicotine level restrictions in cigarettes. The motive behind this move is to further protect the health of smokers. But given that nicotine is what makes cigarettes so popular, it isn’t good news for companies like British American Tobacco.

So far, the US Food & Drug Administration (FDA), who regulates these products, hasn’t made any comments regarding the report. And it’s entirely possible these new restrictions won’t come into effect. But the uncertainty appears to be negatively impacting the BATS share price, for now.

Looking to the future

I believe tobacco-based products will always face a strict regulatory environment that’ll continue to pose a threat in the future. However, the management team has fully acknowledged this risk and has since begun to diversify its portfolio of products. The firm is already seeing a rise in popularity of alternatives to cigarettes, such as vaping devices. It’s even started investing some of its capital into the cannabis sector.

As it stands, these alternative products contribute very little to the top line. But the management team is expecting them to represent around 20% of the revenue stream by 2025.

The British American Tobacco BATS share price has its risks

The bottom line

Seeing a company adapt to changing consumer habits is always a good sign, in my eyes. However, its alternative products are still surrounded by tight regulation at this stage, especially its foray into the cannabis sector.

As it stands, the substance remains illegal for non-medical uses in both the UK and most States in the US. The decriminalisation of marijuana will be an essential requirement to succeed within this space. And while there are expectations of this happening, it’s currently unclear when that might be.

Having said that, based on the current performance and the BATS share price, the 7.8% dividend yield looks very attractive, as well as maintainable. And so, personally, I think this is a buying opportunity for my income portfolio, despite the risks.

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.

Zaven Boyrazian does not own shares in British American Tobacco. 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

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

£1,000 invested in Lloyds shares 5 years ago is now worth…

Anyone who’s owned Lloyds shares over the last five years is probably laughing right now with impressive returns that crushed…

Read more »

A mature woman help a senior woman out of a car as she takes her to the shops.
Investing Articles

If a 50-year-old puts £500 a month into a SIPP, here’s what they could have by retirement

Investing £500 a month with a SIPP could build a pension pot worth £269,900 or quite a bit more over…

Read more »

A rear view of a female in a bright yellow coat walking along the historic street known as The Shambles in York, UK which is a popular tourist destination in this Yorkshire city.
Investing Articles

How much do you need to invest in dividend stocks to target a £1,000 passive income?

Want to earn an extra £12,000 each year with dividend stocks? Zaven Boyrazian explores how much money investors need to…

Read more »

Finger pressing a car ignition button with the text 2025 start.
Investing Articles

FTSE shares for beginners: 2 solid picks to consider when starting a Stocks and Shares ISA

For those new to investing, Mark Hartley explains why he believes these two FTSE shares could help kickstart a resilient…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Here’s how to invest £10k to target a 7% dividend yield in 2025

Want to earn a lucrative and sustainable 7% dividend yield? Zaven Boyrazian explains the strategy he uses to generate plenty…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’m taking Warren Buffett’s advice as stocks reach record highs

Warren Buffett's wisdom is guiding my investing strategy in 2025 as stocks start reaching new all-time highs. Here's how I'm…

Read more »

Young woman carrying bottle of Energise Sport to the gym
Investing Articles

See what £10k invested in Legal & General shares in January is worth today

On the face of it, Legal & General shares have been a massive disappointment, says Harvey Jones. Yet the FTSE…

Read more »

DIVIDEND YIELD text written on a notebook with chart
Investing Articles

This FTSE 100 stock yields 9.36% but I still wouldn’t touch it with a bargepole!

Harvey Jones is stunned by the massive amount of dividend income on offer from this FTSE 100 stock but is…

Read more »