Down 25%, where will the British American Tobacco share price go next?

The British American Tobacco share price has taken a hit. But this Fool isn’t deterred. He think’s now could be the time to buy.

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The British American Tobacco (LSE:BATS) share price is down 25.2% in the last year. I think the stock could now be one of the best bargains on the FTSE 100.

I’m already a shareholder in the tobacco stalwart. But at their current price, I think the shares could be a screaming buy.

A dying industry?

Now, I know what many investors will think. The company sells cigarettes. Isn’t that a dying industry?

Well, I can’t argue with that. Governments across the world have made no secret of their desire to eradicate smoking. As we push towards a ‘smoke-free’ society, this could harm British American Tobacco.

We saw this most recently in its 2023 results. Where before it was assumed that brands sold in its US market, such as Newport, were expected to have an indefinite life, the business now estimates these brands to have a useful economic life “not exceeding 30 years”.

Last year, it sold 555bn cigarettes. Those sales made up 81% of its revenue. So, it’s clearly still heavily reliant on these sales. ESG (environmental, social, governance)-focused investors will no doubt be avoiding buying the stock any time soon.

New Categories excels

But 555bn is a massive number, right? And while in years to come we may see smoking become extinct, this won’t be for some time. Right now, it’s still a huge market.

On top of that, I’m not too worried about that. That’s because British American Tobacco has made great strides in its New Categories division, which sells vapour and oral products. For 2023, revenue for this division jumped an impressive 21%. It marked the first year that it turned a profit. That’s two years ahead of schedule.

A meaty yield

There’s also another major draw that comes with a beaten-down share price. A whopping 9.8% dividend yield. If I wanted to find a higher yield on the FTSE 100, I’d be hard-pressed. In fact, my only options would be Vodafone and Phoenix Group Holdings.

As if its meaty yield wasn’t enough, there’s also the fact it’s a Dividend Aristocrat. The business has increased its annual payout for almost 25 years. Of course, dividends are never guaranteed. But that incredible track record makes me confident of receiving a payment.

As a shareholder, it was also pleasant to read in the firm’s full-year results its intentions to look to return value to shareholders. British American Tobacco owns a 30% stake in ITC, India’s largest cigarette manufacturer. However, it’s planning a partial sale in the months to come. With the money it receives, investors are optimistic the business will implement share buybacks.

Where next?

So, where will the British American Tobacco share price head next? I’m hoping it’ll be upwards.

The business faces a major challenge in the years to come as it adapts to changing consumer trends and government regulations. However, it showed its potential last year, posting a strong performance in its alternative products range. The extra income is a bonus too.

If I had the cash, I’d add to my position with the intention to hold onto my shares for the long run.

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 Keough has positions in British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. and Vodafone Group Public. 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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