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UK shares have sold off heavily again in recent sessions. It’s a downturn that means the eye-popping dividend yields on many FTSE 100 stocks have moved even higher.
As a big fan of value stocks, I’m looking to go shopping following the stock market’s fresh slump. And the cheap British American Tobacco (LSE:BATS) share price has grabbed my attention in recent days. But is this high-yield company a brilliant bargain or a potential investor trap?
Big discount
Cigarette stocks like British American Tobacco (LSE:BATS) have traditionally been popular with investors looking for lifeboats during tough times. This is thanks to the addictive nature of their products, which means revenues and cash flows remain stable.
As a consequence, companies like this could also be relied on to pay big dividends in all weathers.
This particular FTSE business has also been sought after because of the enormous brand strength of its products. Its Pall Mall and Camel lines are two of the world’s most popular tobacco brands, according to Statista.
In this respect the company has similarities with other fast-moving consumer goods (FMCG) giants like Coca-Cola Hellenic Bottling Company, Unilever, Diageo, and Reckitt. However, as the chart below shows, British American Tobacco shares trade at a significant discount to those other companies.
Created by TradingView
Today, British American trades on a forward price-to-earnings (P/E) ratio of around nine times. This is comfortably below the FTSE 100 average of around 12 times, too.
But I believe the company fully warrants this low valuation. It reflects the increasingly hostile environment they are operating in as lawmakers push smoking towards extinction.
Just today, for example, UK Prime Minister Rishi Sunak announced laws to steadily raise the legal age for buying cigarettes in England. The age will increase by one year every year, a plan the government says will reduce smoker numbers by around 1.7m by 2075.
A widescale problem
Unfortunately for ‘Big Tobacco’, restrictions on the sale, marketing, and consumption of these products are becoming more and more prevalent across developed and emerging regions alike. The spread across South-East Asia and Eastern Europe is especially dangerous as this is where the lion’s share of the world’s smokers are.
What’s more, laws surrounding e-cigarettes and heated tobacco products are also rapidly tightening as a result of growing health fears. Indeed, the UK government has also revealed plans to limit flavours and regulate packaging to reduce the appeal of these next-generation products to children.
Steady decline
The good news is that British American Tobacco continues to win market share to offset falling smoker numbers. Its cigarette volume share rose 10 basis points in the first half of 2023.
Created by TradingView
But this isn’t enough to encourage me to invest. Fear over a toughening trading landscape has pulled British American Tobacco shares 28% lower during the past five years. It’s my view that it could have much further to fall, too, over the long term.
So despite the company’s low P/E ratio and 9.4% dividend yield, I’d still rather buy other FTSE 100 dividend stocks right now.
