Predicting the Exact Position of British American Tobacco in the Next Year
Predicting the Exact Position of British American Tobacco in the Next Year
British American Tobacco (BTI) (-0.33%) falls under the consumer staples sector, but it might be one of the riskiest choices within this category. Its dividend yield, which hovers around 8.2%, is over three times greater than the average dividend yield in the consumer staples segment. There's a strong likelihood that the dividend will be paid out as it has been in the past, even for the subsequent year. However, this doesn't mean that British American Tobacco's operations aren't becoming progressively riskier.
The downward spiral isn't in British American Tobacco's favor
Investors need to acknowledge that cigarettes form the backbone of British American Tobacco's operations. Analyzing the company's first half 2024 results will reveal this truth, as a foreign entity reports semi-annually. Its combustibles division accounts for approximately 80% of the revenue, with cigarettes themselves making up nearly 98% of the volume. Therefore, close to 80% of its business depends on cigarettes.
This is a significant concern from a business standpoint because cigarette sales have been on a steady decline. By the first half of 2024, British American Tobacco observed a 6.8% decrease in cigarette sales compared to the same period in 2023. In 2023, cigarette sales dropped by 5.3%, and in 2022, the decline was 5.1%. Though the trend can be traced back further, the last three years' data highlights the predicament of this consumer staples company. The accelerating downtrend is a clear indicator of the situation.
If the 6.8% decline during the first half of 2024 continues throughout the year, British American Tobacco's cigarette sales will drop from around 555 billion cigarettes in 2023 to 517 billion in 2024. By extending this projection to another year, we can estimate that approximately 482 billion cigarettes will be sold in 2025, assuming the rate of decline remains constant.
British American Tobacco acknowledges the problem
British American Tobacco has thus far offset the impact of volume declines with price increases. However, price increases can only be sustained for a limited period before they start exacerbating the volume decline. The company recognizes the challenge it faces, as demonstrated by its decision to change its accounting practices related to its U.S. brands in 2023. While it's a complex GAAP accounting issue, the company shifted from valuing its brands indefinitely to assuming they will be worthless in 30 years.
By 2024, its U.S. brands will have 29 years of "value" left. By 2025, the remaining life of the brands will be 28 years. As each year passes, a year of life is lost. This is why the company is actively working on diversifying its businesses, which account for around 20% of its overall revenue. While progress is being made in this direction, British American Tobacco remains far from the point where its emerging businesses, such as nicotine pouches, can fully counteract the declining business within its most significant business segment.
A year might be sufficient, but what follows is uncertain
Investors seeking a high dividend yield of 8.2% from British American Tobacco can be reasonably certain that the quarterly payments will continue uninterrupted in 2025. However, most income investors don't invest in a stock with the goal of holding it for a single year. If you purchase British American Tobacco based on the assumption of stable income for life, you might want to reconsider. British American Tobacco faces substantial risks as it navigates the negative trends in its core business, and careful monitoring is essential if you decide to invest.
Investors looking to allocate their finance into the stock market might want to consider the impact of British American Tobacco's declining cigarette sales on its future financial performance. With cigarette sales making up almost 80% of its revenue, any further decline could significantly impact its revenue streams. Moreover, British American Tobacco's decision to reassess its U.S. brands' value, acknowledging their finite lifespan, indicates that it recognizes the need to diversify its business to secure its future income sources. This shift in focus towards investing in emerging businesses like nicotine pouches could be crucial for long-term investors seeking stable income.