
Funtay
Shares of cigarette maker British American Tobacco (NYSE:BTI) bought whacked yesterday after the corporate mentioned that it will write down the worth of its U.S. cigarette manufacturers by roughly $31B resulting from challenges within the U.S. flamable market. The announcement brought about the corporate’s ADR worth to drop 9% which I imagine is a shopping for alternative. The decline in British American Tobacco’s share worth is probably going exaggerated, in my view, because the tobacco firm confirmed that its EPS development goal will not be affected. I don’t see the dividend being in danger after the impairment announcement and I imagine the drop constitutes a lovely shopping for alternative for dividend traders on the lookout for an entry right into a 6X P/E worth inventory!
Earlier score
I beneficial shares of British American Tobacco within the third quarter as a result of the corporate’s vape merchandise, marketed beneath the Vuse model identify, are performing very nicely and seeing appreciable income and gross margin momentum. Yesterday, shares of British American Tobacco got here beneath important promoting strain because the market overreacted to a buying and selling replace that laid out the corporate’s plans to put in writing down the worth of its U.S. cigarette model holdings. For the reason that dividend shouldn’t be in danger, I’m aggressively accumulating BTI’s shares.
British American Tobacco takes $31B impairment, EPS steerage and dividend are unaffected
British American Tobacco disclosed in a brand new submitting with the inventory change that, given continuous strain on the U.S. flamable market, the agency has determined to put in writing down the worth of its cigarette model holdings by £25B which comes out to about $31B. The write-downs relate to U.S. cigarette manufacturers like Camel, Fortunate Strike, Newport, and others which British American Tobacco added to its portfolio by way of the $49B acquisition of Reynolds American in 2017.
The transaction boosted BTI’s fairness and asset values on the time. At the moment, British American Tobacco’s e book worth exceeds $91B which will probably be considerably diminished (by the above said quantity) as soon as the impairment cost has been taken. From a threat perspective, extra write-downs are doubtless and BTI might in the end search strategic actions for its remaining U.S. cigarette model portfolio.
British American Tobacco’s impairment cost regarding its U.S. cigarette manufacturers is the primary time {that a} main tobacco firm is decreasing the worth of its core tobacco investments within the flamable market, indicating that administration sees continuous headwinds for the standard cigarette market. Headwinds, which have been well-discussed up to now, embody a declining share of people who smoke which is negatively impacting trade cigarette volumes, but additionally growing regulation that’s making it harder for tobacco corporations to develop their high strains.
The truth is, nearly the entire high line development that corporations like British American Tobacco or Altria (MO) are seeing pertains to development in non-traditional product classes like vape merchandise, heated tobacco sticks, or nicotine pouches. British American Tobacco additionally mentioned yesterday that given the headwinds within the U.S. flamable market, it should search to generate 50% of its revenues by 2035 from non-traditional tobacco merchandise.
The takeaway from British American Tobacco’s submitting is three-fold: 1) The long-term values of U.S. cigarette manufacturers are impaired and it’s doubtless that different tobacco corporations will observe go well with and likewise write down the worth of their cigarette manufacturers, 2) BTI might speed up its transition to non-traditional product classes and select to dump its remaining U.S. cigarette manufacturers, and three) The impairment cost will not be going to impression British American Tobacco’s earnings development steerage. The tobacco agency continues to count on mid-single determine adjusted diluted EPS development in FY 2023 (in fixed forex phrases).
Since BTI pays out lower than 50% of its earnings, I imagine the dividend (and the ten% yield) won’t be affected by the impairment announcement. For comparability, Altria had a money dividend payout ratio of 79% within the final yr.
In search of Alpha
Purchase the panic: get a ten% yield + a 6X P/E worth inventory
Since British American Tobacco’s ADR worth crashed 9% yesterday, dividend traders are confronted with a singular funding alternative as they will capitalize on yesterday’s exaggerated sell-off. Shares of British American Tobacco are priced at 6.3X FY 2024 earnings and, subsequently, commerce at a large 16% earnings yield. BTI now additionally trades 17% beneath its 1-year common P/E ratio and 22% beneath Altria’s P/E ratio.
As a result of the impairment is a non-cash accounting occasion that received’t have an effect on BTI’s precise earnings or money stream, the drop in pricing is an efficient alternative to purchase the panic aggressively, in my view. I imagine British American Tobacco might moderately be valued at 8-9X ahead earnings contemplating that the tobacco agency helps its dividend with earnings. An 8-9X P/E ratio implies 35 upside revaluation potential and, on a mid-point foundation, a extra average earnings yield of 12%.
Dangers with British American Tobacco
British American Tobacco’s regulatory submitting confirmed that the corporate continues to count on rising strain on its U.S. flamable enterprise as much less individuals smoke and the U.S. authorities seeks to decrease the nicotine ranges in cigarettes and should transfer to outlaw menthol cigarettes in 2024 altogether. Consequently, extra impairment prices from British American Tobacco and different tobacco corporations might observe.
Last ideas
Buyers are doubtless overreacting to British American Tobacco’s announcement yesterday because the FY 2023 EPS development projection and the flexibility to pay the dividend usually are not affected. British American Tobacco is well-positioned within the vapour market, which I beforehand indicated, and is seeing sturdy development momentum on this market. For my part, dividend traders have a singular alternative right here to benefit from the sell-off and add BTI to their portfolios. Since British American Tobacco additionally trades at an irresistible 6X P/E ratio (16% earnings yield), I’m shopping for the panic and am accumulating shares aggressively!