It looks like ESG issues have cratered the British American Tobacco (LSE: BATS) share price.
The stock had been struggling with them anyway, what with selling cigarettes and everything. But the latest scandal – involving North Korea, of all countries – has sent the share price into a tailspin. It’s down 19% year to date.
I have to say, though, the shares do look cheap. I might have a rare chance here to pick up underpriced stock in a big dividend payer, and the evidence suggests it might even be the best bargain on the FTSE 100.
The first reason to buy into British American Tobacco is nothing to do with what’s going on now. Rather, it’s been a terrific stock to own for decades. Of all companies on the FTSE 100 when the index started in 1984, this one has returned the most to shareholders.
Over time though, ESG (environmental, social, and governance) concerns have become a more and more pressing issue. With regard to British American Tobacco, they largely revolve around cigarettes and the links to cancer and mortality. Many investors won’t touch a tobacco stock, nor many funds.
With ESG being such a big question mark, I was left scratching my head with what happened earlier this year. In short, the firm broke US sanctions by selling its products (through a subsidiary) to North Korea. It resulted in a £635m fine.
Ten-year low
This happened a while ago, between 2007 and 2017. But still, you have to ask: what was management thinking? Violating US sanctions? Doing business with the least democratic country on Earth? It’s almost comical.
The fine was announced in April and the shares have been sliding since. A share now costs around £26, which is near a 10-year low. I could have bought in at this price back in 2011.
Of course, the stock market works on a supply and demand basis, so with investor sentiment as low as it is, the shares could be drastically undervalued. And looking at the evidence, they very well might be.
The dividend looks as good as ever, for one. The yield is 8.62% as I write, with big increases forecast for the years ahead. The firm makes tonnes of cash and the payments are well-covered. It could be the FTSE 100’s best dividend.
The stock looks cheap too. It’s priced at seven times earnings, pretty cheap compared to competitors like Altria at eight times and Philip Morris at 12 times.
A buy?
I’d have to overlook those ESG issues, of course. And if I was a purely ethically minded investor, I wouldn’t come near the stock. Its products cause cancer and everyone knows it. Throw in a boardroom content to violate US trade sanctions and, well, I wouldn’t blame anyone for picking up the proverbial bargepole here.
With that said, I’m looking at this as a value play. And on that basis, it looks really, really good. I do have a position already and I think it has a strong claim to be the FTSE 100’s greatest bargain.
