We’re now a couple of months on since the coronavirus outbreak put the world on lockdown and shook financial markets. It’s too soon to predict with any accuracy the long-term changes global citizens will have to adopt. However, it’s clear that some FTSE 100 stocks stand to suffer considerably in a post-pandemic landscape.
One of these potential casualties is British American Tobacco (LSE: BATS). Why? Well, data suggests the number of smokers jacking in the habit has ballooned on the advice of health experts.
A joint study from YouGov and campaign group Action on Smoking and Health (ASH) suggests 300,000 smokers have tried to stub out for good during the crisis. A further 2.4m have cut down on the number of cigarettes they use too.
That comes amid claims smokers are more prone to initial infection and suffer difficulties during recovery. It follows comments from health secretary Matt Hancock, who recently claimed: “It is abundantly clear that smoking makes the impact of a coronavirus worse.”
Sales to slip
Global cigarette demand has been in a state of serious decline for years now. A ratcheting up of restrictions on the marketing, the sale, and the usage of tobacco products by governments the world over has smashed their grip on the general public. By the signs of it, the pandemic has stepped up the plight of Big Tobacco to a considerable degree. Not just in Britain, but across the world.
The likes of Footsie-quoted British American Tobacco aren’t quite in panic mode. Last week, BAT claimed it had made “a strong start to the year.” Volumes had grown amid a rise in both trade and consumer stocks, while a positive price mix has bolstered revenues too.
Don’t break out the bunting just yet. There’s a strong suggestion sales have surged in recent weeks due to panicked stockpiling by die-hard smokers. British American Tobacco said trade and consumer stocks are expected to reduce in the second quarter, crimping both industry volumes and sales growth in the period.
It’s clear the FTSE 100 colossus expects sales to tail off from the recent spike. That’s why it cut both its estimates for adjusted revenues and volumes (stick volumes are now expected to drop 5% in 2020).
A FTSE 100 stock I’d avoid
But is the Footsie firm worth the risk at current prices? British American Tobacco’s shares certainly look cheap on paper. At current prices, the tobacco titan changes hands on a price-to-earnings (P/E) ratio of 8.8 times for 2020.
It’s in the dividend stakes the company might attract the most attention though. Amid a sea of payout cuts from UK blue-chips, this particular mega-cap plans to keep on doling out dividends this year. And, based on current City predictions, this creates a bulky 7.4% yield.
I’m not tempted to buy by either of these readings though. British American Tobacco’s long-term outlook was looking pretty fragile even before the coronavirus crisis struck. Its earnings picture now looks flakier than ever. I’d much rather go bargain hunting elsewhere on the FTSE 100.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.