The British American Tobacco (LSE: BATS) share price took a 9% tumble in the last two weeks. It’s now down 18% for the year, whereas the FTSE 100 is up overall.
Might this be a rare buying opportunity? After all, no company on the Footsie has returned more to its shareholders since the index’s inception in 1984.
Better still, a terrific forward dividend of over 8% and a price-to-earnings ratio lower than it has been in years makes the share price looks like a bargain.
The big question is, am I going to buy in?
Number one for sales
First off, I’m encouraged by recent sales figures. BAT sells its cigarettes of brands like Dunhill, Lucky Strike and Camel worldwide, which helped it surpass £27bn in total revenue for 2022.
Impressively, that makes the London-based firm the largest cigarette seller in the world based on sales volume.
What’s more, revenue has been steadily increasing in recent years, driven by rising wealth in what the World Bank calls ‘middle-income countries’. There are actually more smokers now worldwide than ever before
| 2018 | 2019 | 2020 | 2021 | 2022 | |
| Revenue | £24.5bn | £25.9bn | £25.8bn | £25.7bn | £27.7bn |
| Margin | 25% | 22% | 25% | 26% | 24% |
| Net income | £6.0bn | £5.7bn | £6.4bn | £6.8bn | £6.7bn |
| Free cash flow | £9.4bn | £8.2bn | £9.0bn | £9.0bn | £9.7bn |
Excellent and consistent margins of over 20% have led to over £6bn net income and £9bn free cash flow year after year.
The business is simply drowning in cash, which means it has tons of money to pay out to its shareholders as dividends.
Over 8% dividend yield
Today’s dividend yield stands at 7.97% which is the 4th highest on the entire FTSE 100. The forward dividend is even higher at 8.24% which would suit me very nicely.
Looking further back, dividends have been in the 5%-10% range since 2018. And the actual payout, which BAT makes quarterly, has been slowly increasing for years.
Further good news is that the company spends around 75% of its income on dividends – a dividend cover of 1.3. That figure seems sustainable for payments long into the future.
A surprisingly cheap valuation
At today’s share price of £27.28, BAT doesn’t even seem like an expensive stock to buy. That’s despite the superb financials.
Its price-to-earnings ratio has dipped below 10 recently. That looks cheap compared to the FTSE 100 average of around 14.
A 0.93 price-to-book ratio looks like great value too. It’s a nice margin of safety when I’m – in theory, at least – getting £1 in assets for every 93p of investment.
Risks
A big danger when looking at stocks is to ignore any risks. And when I’m deciding whether to buy here, it’s hard to ignore that cigarette usage is shrinking in many countries.
Do I want to pick up some shares when, in the UK for example, 40% of adults smoked in 1980 but that went down to 13% in 2021?
BAT does make 14% of its revenue from non-combustibles – e-cigarettes, vapes and the like. But it’s unclear whether those products can fully replace cigarettes.
Am I buying?
All in all, the cheap price and repeated success of BAT over recent decades makes this a buy for me. This is why I took the opportunity to open a position recently.
