Titled "Considerations for Investing in British American Tobacco Stock in 2024: Opportunities and Challenges"
As 2024 draws to a close, British American Tobacco's (BTI -0.11%) stock has seen a staggering 25% year-to-date price surge, primarily in the second quarter of the year. This significant gain, particularly for an income investment, raises the question: Is this cigarette maker still worth investing in, or should investors steer clear? Let's delve into four critical factors to consider.
The Divine Dividend: A Powerful Attraction
The primary allure of British American Tobacco is its high dividend yield. Despite the price surge, it still offers an impressive 8% dividend, outperforming the S&P 500's 1.2% and the average consumer staple stock's 2.5%. And since it switched to quarterly dividends in 2018, the company has annually boosted its payout, making it a reliable source of income.
The Beating Heart: Cigarette Sales Recession
The alluring dividend cannot overlook the company's underlying business issue: a declining cigarette market. Although no tobacco company has been thriving recently, British American Tobacco's sale volumes have dropped consecutively in the last four years. This downtrend led to a stock collapse in 2022 and 2023, with the market cap plummeting over 40%.
The Write-off Warning: A Glimpse of the Future
In December 2023, British American Tobacco took a brutal 23 billion GBP write-off due to the potential obsolescence of its US cigarette brands within the next 25 to 30 years. This write-off significantly impacted their 2023 earnings, but its more profound implication shows Britain’s cigarette operations might be on their last legs.
The Growth Gap: Betting on New Markets
Despite these challenges, British American Tobacco isn't sitting idle. The company is diversifying its product portfolio, focusing on alternative nicotine and tobacco products such as e-cigs, pouches, and heated tobacco. Despite its ups and downs, the new category business accounted for around 16.5% of revenues in the first half of 2024, offering hope for a potential long-term opportunity to offset the declining cigarette market.
The Big Decision: Tradeoffs and Risks
As an investor, weighing the pros and cons is essential. While the high-yielding dividend is attractive, it's vital to recognize British American Tobacco's core business issues. This isn't a stock you can buy and forget; instead, it requires close attention to monitor the cigarette volume decline's impact on the dividend's long-term sustainability.
[1] Source: Investopedia, British American Tobacco (BAT) Fundamentals and 2023 Q2 earnings call[2] Source: The Guardian, British American Tobacco's entry into Indonesia exposes the pitfalls of its developing-country strategy.
Given the strong dividend yield of British American Tobacco, investors might consider this as an attractive opportunity for income finance. However, the continuing decline in cigarette sales and the potential obsolescence of certain US brands pose significant risks to the company's future. As such, investors should carefully consider these factors and monitor the impact on the long-term sustainability of the dividend before making an investing decision.
Given British American Tobacco's strategic shift towards alternative nicotine and tobacco products, this could present an intriguing opportunity for those looking to invest in the financing of emerging trends in the industry. Despite the challenges, the company's growing presence in new markets, such as e-cigarettes and heated tobacco, could potentially help offset the declining cigarette market in the long run.
