Share prices of British American Tobacco (BTI 0.10%) have fallen roughly 55% since hitting a high-water mark in 2017. The dividend yield is now an incredibly high 9.4%. If you're a dividend investor, is now the time to jump in?
The answer isn't an easy one.
Why is British American Tobacco stock falling?
Whenever a stock sees dramatic price drops the first question investors should ask is, "Why?" The answer is pretty simple with British American Tobacco. The company is one of the largest makers of cigarettes on Earth, with a globally diversified tobacco business. Cigarette volumes have been in decline for years.
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To put a number on that, the company made 700 billion cigarettes in 2018. But by 2023, that number had fallen to 555 billion. Do the math and you see the company's volume fell by a whopping 21% in five years. That alone is a frightening figure.
But it gets worse.
In 2023 British American Tobacco changed the way it accounted for its U.S. brands, which include Camel and Lucky Strike. Formerly it treated the brands as if they would exist forever, but it now assumes they will become worthless in roughly 30 years. While this is a bit of an arcane accounting issue, the big takeaway is that British American Tobacco is admitting that its U.S. cigarette business is in terminal decline.
Given that backdrop, it should be pretty clear why the stock price of this consumer staples company has fallen so hard. If you're a conservative investor, you should probably avoid the shares.
The good news at British American Tobacco
However, not all of the news is bad and that might interest more aggressive investors. British American Tobacco, like its peers, has been able to push through price increases to offset the impact of the volume declines. That has allowed it to keep supporting its dividend in the face of distressing industry conditions. It seems likely that this tactic will remain effective for at least a little while longer.
But this isn't all that British American Tobacco is doing. The company has been working to find alternative tobacco and nicotine products to replace its declining cigarette operation. At present that business accounts for around 16.5% of the top line. The goal is to get that to 50% by 2035. The early success has been pretty strong.
Perhaps the most notable win, however, happened in 2023. The company's so-called "new categories" division was profitable at the division level. That was achieved a full two years ahead of management's expectations. But the really big takeaway is that this isn't a case of throwing money at a business in the hope that it will succeed. It is succeeding.
For more aggressive investors willing to bet that British American Tobacco can transition its business away from cigarettes, the stock's steep price decline and high yield could be very attractive.
Is now the time to buy British American Tobacco stock?
As noted, buying British American Tobacco if you're a conservative investor probably won't be a great fit. It's not a sleep-well-at-night stock given the material headwinds it faces in its most important business. But if you're an aggressive investor, well, the success it has achieved in the new categories segment of the business might be enough to entice you into the stock. Just go in knowing that the risk is high and that the declining cigarette business is still the dominant force. You'll need to watch British American Tobacco like a hawk if you buy it.
