British American Tobacco Proclaims a Share Buyback. Here’s What Investors Must Know.

Tobacco and nicotine products company British American Tobacco (NYSE: BTI) recently said it had repurchased 150,000 shares of stock at a mean price of about $32. Corporations repurchase their stock on a regular basis; once purchased, it’s taken out of circulation, which reduces the variety of shares outstanding.

Corporations repurchase shares for various reasons, often to send a message to the market or shareholders. So, what does British American Tobacco’s repurchase potentially say concerning the stock, and may investors follow suit and buy shares for themselves?

What do share repurchases mean for investors?

Share repurchases are quite common. They’re certainly one of the first methods (together with dividends) firms use to share profits with shareholders. Share repurchases decrease the variety of shares outstanding, which drives higher earnings per share (EPS). Higher EPS generally translates to the next share price.

Many firms routinely repurchase shares, whatever the stock’s valuation. Nevertheless, prudent management teams will consider the stock’s valuation to make sure the repurchases are as effective as possible. The lower the share price, the more shares your repurchase will take out of circulation.

Now looks as if an excellent time for British American Tobacco to repurchase shares. The stock has fallen nearly 50% from a decade ago, a disaster in comparison with the S&P 500, which has greater than doubled during that point.

^SPX Chart

British American Tobacco sold about $2 billion of its stake in Indian conglomerate ITC earlier this 12 months. The repurchases you see are a part of management’s plan to make use of among the proceeds to scale back the share count. Management plans to repurchase stock through the tip of 2025.

Why has British American Tobacco performed so poorly?

Some immediately write off British American Tobacco because its stock has performed poorly, but that might be a mistake.

The stock’s struggle seems primarily attributable to an excessively expensive valuation that has taken years to unwind. Smokeable products are British American Tobacco’s legacy business. Most individuals know that smoking rates have been declining for a long time attributable to the harmful nature of the habit. The numbers support this; the corporate sold 756 billion “sticks” in 2017, but that volume fell to simply 555 billion in 2023. It would likely proceed falling over time.

British American and other tobacco firms not only raise prices to compensate for selling fewer sticks, but are also selling next-generation products like oral nicotine pouches and electronic cigarettes. These moves are helping generate earnings growth despite smoking declines. Still, it is difficult to categorise British American Tobacco as a growth business. Analysts consider earnings will grow by a mean of just 4% annually over the long run.

For some reason, shares of British American Tobacco traded at 24 times earnings in the beginning of 2018. The market can do odd things, and it’s hard to fathom how this business would warrant such a high valuation. Knowing all this helps put the stock’s multiyear slide in context.

Here is why British American Tobacco is a wonderful buy at once

Investors willing to look forward and never on the stock’s past might be a wonderful opportunity. Gone is the bubbly price tag BAT once had; shares trade at a forward P/E of between 6 and seven today, an inexpensive, arguably low-cost, value for a corporation with earnings growth of 4% yearly. Barring more irrational market motion, investors could reasonably expect future investment returns to mirror the corporate’s earnings growth.

That alone is not exciting, but it surely gets more enjoyable if you think about the large dividend, which yields 9.6% today. High dividend yields could be a red flag, but not this one. Tobacco firms are known for dependable money flows, and British American’s dividend payout ratio is barely about 50%. Investors should feel confident the dividends will proceed flowing to their pockets.

Add it up, and investors are total returns of about 13% to 14% annually, making it a possible market-beater. That is an amazing turnaround from the stock’s years of underperformance.

Must you invest $1,000 in British American Tobacco at once?

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Justin Pope has no position in any of the stocks mentioned. The Motley Idiot recommends British American Tobacco P.l.c. and recommends the next options: long January 2026 $40 calls on British American Tobacco and short January 2026 $40 puts on British American Tobacco. The Motley Idiot has a disclosure policy.

British American Tobacco Proclaims a Share Buyback. Here’s What Investors Must Know. was originally published by The Motley Idiot

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