It’s been a poor 2023 for British American Tobacco (LSE: BATS) shares. Since the turn of the year, the stock has steadily declined. As I write, it’s down by over 20%.
However, this drop means that the shares are flirting with their 52-week low. So, does this present a chance to add the stock to my portfolio?
Unpopular industry
Firstly, let’s address the elephant in the room. The tobacco industry is falling out of fashion.
In recent years, there has been a global push for society to become ‘smoke free.’
This has been seen in nations such as China, where the government recently doubled the consumption tax on cigarettes. In the US and mainland Europe, it’s been predicted by some that smoking will be extinct by 2050.
Should this trend continue, this could impact the British American Tobacco share price going forward.
Demand still strong
Despite its growing unpopularity, it would be naïve to ignore the size of the tobacco industry. In summary, it’s huge.
Last year saw the company sell over 600bn cigarettes. And more recently, its half-year results saw revenue, profit from operations, and earnings all increase.
The business is also home to brands such as Lucky Stripe. With premium names such as this under its belt, a degree of pricing power provides it some immunity to falling demand.
Aware of current trends, it’s also placing emphasis on non-cigarette income streams.
For example, it now sells vapour products as well as modern oral products, including its brand Velo, which has risen in popularity in recent times.
For the first half of 2023, New Categories revenue jumped over 25%. By 2025, the business targets to have revenue contributions north of £5bn from this line of business.
Passive income opportunity
Another major draw to British American Tobacco is its huge dividend yield. The stock currently offers investors a yield of nearly 9%.
Despite the risks it may face in the years ahead, the company doesn’t seem to be slowing down. Last year it raised its dividend by 6%.
More so, it also continues to generate impressive free cash flows. After paying just shy of £5bn in dividends last year, it still had over £3bn of free cash flows.
Alongside its high dividend, with a price-to-earnings ratio of just nine, the stock also looks cheap for a blue-chip company. This is below the average of its FTSE 100 peers and potentially signifies there’s value to be had with the stock.
Would I buy?
Well, with its substantial dividend yield and low valuation, there’s certainly a lot to like about the stock.
Of course, there are risks given the rising scrutiny of smoking. And I’d be lying if I said this isn’t of concern.
However, at its current price, I see an opportunity.
With its diversification, I think the business is in good shape to withstand the risk of falling demand for traditional products. And its latest results clearly highlight demand is still there. If I had any cash to spare, I’d be tempted to open a position in British American Tobacco.
