British American Tobacco (NYSE: BTE) It’s a consumer staple stock, but it’s probably one of the riskiest consumer staples stocks you can buy. This is highlighted by its dividend yield, which at around 8.2% is three times greater than the yield of the average consumer staples stock. There is a very high possibility that the dividend will be paid exactly as it has in the past within the next year. But that doesn’t mean British American Tobacco’s business isn’t becoming increasingly risky.
The first thing investors should realize is this Cigarettes It is the core of British American Tobacco’s business. A little math with the company’s 1H 2024 results will prove this (as a foreign company it only reports semi-annually). The combustibles division accounts for approximately 80% of revenue. Among combustibles, cigarettes account for approximately 98% of the company’s volume. So nearly 80% of the company’s business is based on cigarettes.
This is a big problem from a business perspective because cigarette sizes are steadily decreasing. During the first six months of 2024, the company’s cigarette volume was down 6.8% compared to the same six months in 2023. In 2023, British American Tobacco’s cigarette volume was down 5.3%. In 2022, the decline reached 5.1%. This trend goes back further, but these three data points are enough to shed light on what is happening in this regard Consumer goods company -And the fact that the downtrend seems to be accelerating.
If the 6.8% decline in the first half of 2024 is applied to the full year, the company’s cigarette volume will fall from about 555 billion cigarettes in 2023 to about 517 million cigarettes this year. Extend that by another year and you get roughly 482 billion cigarettes sold. This is assuming that the rate of decline will remain the same and not increase as it has been in the past few years.
So far, British American Tobacco has been able to offset the impact of lower volume through price increases. But price increases can only last so long before they begin to exacerbate volume declines. The company is well aware of the problem it faces, too, because in 2023 it changed the way it handles its US brands. Although it’s a somewhat arcane accounting issue, the company has essentially gone from assuming that brands will always have value to assuming that they will be worthless in 30 years.
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