The Motley Fool

Should I buy British American Tobacco (BATS) shares?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Person smoking cigarette
Image source: Getty Images.

I think British American Tobacco (LSE: BATS) shares are looking cheap right now. The stock is trading on a price-to-earnings (P/E) ratio of 8x and has a current dividend yield of almost 8%. 

The stock price performance hasn’t been great. Since the beginning of the year, BATS shares are up over 2% and down nearly 10% over the past 12 months.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

The shares are facing some headwinds right now. But as a pure income play, I’d still buy the stock. 

Bull case

I know smoking is bad and so does BATS. So what’s a company to do that has built its business selling tobacco? It focuses on growing its New Category division, which includes vapour products.

The company is encouraging smokers to switch to these “scientifically substantiated reduced risk alternatives”. It’s worth highlighting here that these products are not completely health-risk-free and are also likely to be addictive.

But this has been working so far for the FTSE 100 firm. So much so that the company expects a clear route to profitability for the New Category division by 2025. This should be positive for BATS shares.

It even upgraded its revenue guidance earlier this week. For 2021, it now expects sales growth of more than 5%. This is ahead of its previous forecast of 3%-5%. To me, this clearly demonstrates that momentum across the business is strong.

As I previously mentioned, BATS shares generate a strong yield of almost 8%. This is great for an income-hungry investor like me. What’s even better is that the income is supported by earnings. The dividend cover is 1.5x, which means that if things carry on as they are, the income payments should continue. Of course, this isn’t guaranteed.

Bear case

I do have two main concerns with BATS shares. The first one is regulation. This isn’t going away and, if anything, will only increase. As I said before, this is why the company is backing its New Category division with full force.  

Most governments are introducing measures to discourage smoking, which will likely place pressure on sales and profitability. It’s a headwind for the stock. I guess time will tell whether it can continue to weather the regulatory environment.

My second concern is the net debt position. This is high, but it’s coming down. At the end of 2020, BATS net debt stood at over £40bn. It expects to reduce this by the end of 2021, so that leverage as a multiple of EBITDA is 3x.

To me this is still high, but I guess the main thing is that the company has strong cash flow and is in a position to pay down its liabilities. I shouldn’t forget that this is while it’s paying shareholders an attractive dividend.

My view

BATS shares are cheap and I think the company is taking the right steps to ensure its survival. I reckon the threat of increased regulation and investors seeking out ethical investments are the reasons behind the low valuation.

But with an attractive yield of almost 8%, I’d buy BATS shares as a pure income play. In my opinion, this is a steady stock, which I don’t expect to deliver stellar price appreciation, but I can’t ignore the dividend.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Nadia Yaqub 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.