A once-in-a-decade chance to buy a FTSE 100 stock near a 10-year low?

This FTSE 100 stock is sinking toward lows last seen over a decade ago but does the colossal 9.1% dividend yield make it a ‘no-brainer’ buy?

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Monitoring which FTSE 100 stocks are trading near 52-week lows is routine for many investors. However, opportunities to buy shares trading near 10-year-plus lows rarely arise.

Potential bargain hunters hungry for such a chance could be in luck. Just a 6% knock to the share price of one index heavyweight would send it to lows not seen since 2011.

That stock is British American Tobacco (LSE:BATS), a perennial member of the FTSE 100 since its inception in 1984.

So, what’s the growth outlook for the tobacco titan today? Is this a cheap stock to consider buying now or an investment to avoid?

Let’s explore.

Reasons to stub out this stock

There are reasons to be cautious about buying British American Tobacco shares.

Global tobacco consumption has been falling for years and government regulation has been growing increasingly stringent. At the sharp end, plans are being introduced in the UK and elsewhere to ban smoking for future generations.

Indeed, a shrinking consumer base is impacting the company’s financial results today. The group’s weak performance in the US — its largest market — is a particular concern. Disappointing sales stateside contributed to the overall 4.9% fall in combustibles volumes for H1 2023.

What’s more, net debt currently stands at over £38bn. This looks high measured against a £56.3bn market cap, although the maturity profile isn’t overly alarming. That said, worries about the firm’s liabilities prompted the board’s decision to pause share buybacks earlier this year. By contrast, FTSE 100 rival Imperial Brands recently announced a new £1.1bn programme last month.

Finally, the Lucky Strike maker faces challenges from its Russian market exit. British American Tobacco has formally agreed to sell its businesses in Russia and Belarus. The group stands to lose around £725m in annual revenue by withdrawing from these countries.

But don’t ignore its potential to light up

Nonetheless, with a price-to-earnings (P/E) ratio of just 6.5, these risks might be factored in following a steep decline in the British American Tobacco share price.

The conglomerate has strong pricing power, evidenced by a 0.4% combustible sales uptick during H1, despite the volumes slump. Moreover, it remains a highly cash-generative business, underscored by £2.3bn in free cash flow.

This helps to support the mammoth 9.1% dividend yield, which eclipses the vast majority of FTSE 100 shares. As a so-called Dividend Aristocrat, history suggests investors can rely on British American Tobacco for passive income. Indeed, forecast dividend cover of 1.7 times looks reasonable enough.

Growth opportunities can be found in the New Category products division, which now accounts for 16% of group revenue. The firm’s ahead of Imperial Brands in the transition to alternative nicotine products, such as vapes, although it lags US competitor Philip Morris.

Increasingly, the company’s also looking for new markets to explore. For instance, its strategic partnership with Organigram — a licensed Canadian cannabis producer — is an interesting development for potential investors to monitor.

A rare opportunity

Overall, British American Tobacco shares look cheap to me today compared to many FTSE 100 stocks. However, there are significant risks facing the industry and some investors may have ethical concerns about the company’s addictive products.

Regarding my portfolio, I’m a shareholder and would add to my position if I had spare cash.

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.

Charlie Carman has positions in British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. and Imperial Brands Plc. 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.

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