British American Tobacco (NYSE:BTI) stock fell 9% overnight after the company took a $31.5 billion “impairment charge” on its American cigarette brands.
British American is known for brands like Camel, Lucky Strike, Newport and Pall Mall. The company says that its U.S. sales were hit by smokers switching to cheaper, generic cigarettes and vapes. CNN reports that British American Tobacco’s write-down cuts the value of some of its U.S. brands to zero in 30 years.
BTI stock opened for trade on Dec. 6 at just under $29 per share and a market capitalization of about $66 billion. Even at its closing price on Dec. 5, shares carried a price-to-earnings (P/E) ratio of less than 6.5 and a dividend yield of around 9%.
A Non-Cash Charge
An impairment charge does not impact a company’s cash position. It is a non-cash write-off of an asset’s value — in this case, the value of the cigarette brands that British American sells in the United States.
U.S. smoking rates have been declining for years, especially among young people. Those who do smoke are also smoking less. By 2021, only about 21% of American smokers reported consuming a full pack per day. Meanwhile, smoking rates are higher in Europe and Asia.
Despite the health costs, British American’s revenues rose in 2022 and generated over $11 billion in operating cash flow. BTI stock pays roughly $2.80 per share each year in dividends, so investors at $29 are getting a yield of nearly 10%. One contributor at The Motley Fool recently speculated whether BTI stock is “too cheap to miss.” At TipRanks, another contributor called shares “ridiculously cheap.”
While other tobacco companies have sought to further diversify, British American has mostly stuck with cigarettes. Meanwhile, Altria Group (NYSE:MO) has lost money on cannabis company Cronos Group (NASDAQ:CRON) and lost billions more on vaping company Juul.
What Happens Next?
Tobacco has long been in bad odor among investors. But someone is going to be holding their nose and buying shares of BTI stock today.
On the date of publication, Dana Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
