If you hold shares in British American Tobacco (LSE: BATS), your week has hardly got off to the best of starts.
Its share price is down 9% in Monday trading as I type, exacerbating the downdraft that first set in almost 18 months ago. Today’s losses mean that the cigarettes manufacturer’s market value has just about halved since it hit record tops above £56 per share in June 2017.
Menthol in the mire?
The investment community has stormed the exits today after reports emerged of a fresh legislative attack on British American Tobacco and its traditional, combustible products.
According to a Wall Street Journal article published over the weekend, the US Food and Drug Administration (FDA) is proposing a ban on the sale of menthol cigarettes, a segment which account for more than one-third of total cigarette sales in the US, according to Barclays Capital.
The menthol market has long been criticised as particularly hazardous by anti-smoking advocates, and the Wall Street Journal cited a 2013 FDA report in its article which showed that such cigarettes are more addictive and more damaging to health than regular tobacco sticks.
Imperial Brands also saw its share price duck on Monday in reaction to the news. But the fall has been less devastating than that of British American Tobacco, as the latter relies much more on the menthol segment to drive the bottom line following the acquisition of Reynolds American and its Newport brand back in 2017.
According to Barclays Capital, British American Tobacco generates approximately 25% of total earnings from menthol. This compares with Imperial Brands, where menthol accounts for some 11% of total tobacco earnings.
Do 7% dividend yields make it a buy?
The start-of-week sell off has exacerbated British American Tobacco’s already-meagre valuation and right now it sports a forward P/E ratio of 10.2 times. Any figure around, or below, 10 times is usually considered extremely low (on paper, that is).
What may also be appealing to many investors is the size of the tobacco titan’s dividend yields. As I type, City analysts predict full-year dividends of 200.9p per share and 212.6p in 2018 and 2019, respectively, projections that yield an inflation-smashing 6.7% and 7.1%.
Neither its low P/E multiple nor its gigantic yields are enough to tempt me to invest, though. The proposed menthol ban which, according to Barclays Capital, could take around two years to implement, follows legislative action on the sale of standard cigarettes that continues to grow governing the sale, marketing and usage of tobacco goods across the globe.
But what’s really shaken investor confidence in the likes of British American Tobacco is the growing regulatory threat facing their so-called next generation products like e-cigarettes and thermal heating products, technologies that will need to thrive in order to offset the lost revenues from traditional tobacco products. Reports also suggest that FDA is also considering banning some sweet e-cig flavours in a sign of this growing trend.
I believe that, right now, the investment risks associated with British American Tobacco are far too high even despite the firm’s low valuations. And I fully expect its share price to continue sinking.
