Can British American Tobacco (BAT) shares arrest their long-term decline?
The performance of British American Tobacco (LON: BATS) shares has been extremely disappointing over recent years. In fact, the tobacco company’s share price is currently down 41% in the past five years. By contrast, the FTSE 100 index has risen by 6% over the same period.
Of course, the outlook for tobacco companies has evolved relatively quickly over recent years. The long-term trend towards an increasingly health-conscious consumer has continued. The end result has been volume declines, with BAT reporting a 1.5% decline in cigarette volumes in its first-half results.
While this trend looks set to persist, tobacco stocks have significant pricing power. Therefore, as they have done for many years, they are in a strong position to raise prices to offset volume declines in the medium term. This may also help them to offer a degree of inflation protection for investors, since they could be relatively successful in passing higher input costs on to end consumers as a result of the relatively inelastic price profile of tobacco products.
Clearly, this strategy is likely to be unsustainable over the long run. The BAT share price is unlikely to be catalysed by a mix of falling volumes and price rises. However, the company’s recent half-year results showed that it is making encouraging progress in pivoting towards reduced-risk products such as e-cigarettes.
Indeed, sales of next-generation products increased by 50% to £942m. They now account for 8% of the firm’s total revenue and could offer significant growth opportunities as improving technology persuades an increasing number of consumers to switch to less harmful options.
BAT shares fall over the past five years has contributed to a rising dividend yield. It now stands at 8%, which is more than twice the dividend yield offered by the FTSE 100 index. Moreover, the firm is forecast to post a 9% rise in earnings per share in each of the next two financial years. Since it trades on a forward price-earnings ratio of 8, it could offer good value for money while the current bull market thrusts stock prices to increasingly high levels.
Undoubtedly, there is a risk that BAT’s reduced-risk products fail to gain further ground as cigarette volumes decline. And, with ESG considerations increasingly driving investment decisions, its shares may be relatively unpopular among investors. However, these threats appear to be factored into its share price, while its valuation suggests it offers a wide margin of safety.
Not Investment Advice
Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.