Last year, the British American Tobacco (LSE: BATS) share price surged. This year, however, it has given up all of those gains and then some.
So, what’s going on with the shares in 2023? And has the large share price fall created an attractive investment opportunity?
Tech stocks vs tobacco stocks
To my mind, there are four main reasons British American Tobacco shares have tanked this year.
The first is the rebound in tech stocks. In recent years, there has been a negative correlation between tech and tobacco. Last year, for example, we saw tech crash and tobacco soar.
This year has been all about tech (due to the interest in artificial intelligence). And I think this has hurt the tobacco stocks.
It’s worth noting that other tobacco stocks, such as Imperial Brands, Philip Morris, and Altria, are also down heavily in 2023.
Government crackdowns
The second reason is that governments have been stepping up their crackdowns on tobacco.
Here in the UK, Prime Minister Rishi Sunak recently proposed a ban on cigarettes for younger people.
Meanwhile, in the US, the US Food and Drug Administration (FDA) recently blocked the sale of six flavours of British American Tobacco’s main vape brand, Vuse Alto.
Ultimately, the landscape for tobacco companies is becoming more and more challenging.
Weight-loss drug fears
Concerns in relation to the long-term impact of GLP-1 weight-loss drugs such as Ozempic and Wegovy on smoking will have also hurt the share price this year.
Apparently, these drugs can reduce the urge to smoke. This adds further uncertainty in relation to the outlook.
Large debt pile
Finally, I reckon the fact that British American Tobacco has quite a lot of debt on its balance sheet has probably spooked investors.
At 30 June, the company’s adjusted net debt stood at nearly £40bn.
That’s obviously more of a problem now that interest rates are much higher than they were 18 months ago.
Higher interest payments could potentially threaten the dividend in the future.
A buying opportunity?
So, are the shares worth buying for my portfolio today?
Well, there is a big dividend on offer at the moment.
At present, analysts expect the company to pay out 239p per share in dividends for 2023. At today’s share price, that equates to a yield of nearly 10%.
So, the stock could be a bit of a cash cow in the near term.
And the shares look very cheap from a valuation perspective. Currently, the forward-looking P/E ratio here is just 6.5.
So, there appears to be some value on offer.
I do have concerns over the long-term outlook for the company, however.
In a world that is becoming more health-conscious, and sustainability focused, I reckon British American Tobacco is facing huge headwinds.
So, I’m going to pass on them for now.
Personally, I think there are better (and safer) dividend stocks to buy.
