Why is British American Tobacco so Cheap?

Our new video series looks at stocks that look cheap or expensive - and why. We kick off with 5-star stock British American Tobacco

James Gard 28 June, 2021 | 9:45AM
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 James Gard: Each week we look at one stock that is cheap or expensive and why. Today let's look at BAT. Why do Morningstar analysts think the stock is so undervalued? Like rival Imperial Brands it has a wide economic moat. The purchase of Reynolds means BAT can compete with industry leader Philip Morris in the US. Cigarette smokers are generally loyal customers, especially those who buy more expensive brands. New products like heated tobacco and e-cigarettes are likely to prove lucrative. Tobacco stocks have traditionally been strong income payers, and BAT actually increased its dividend last year, when other big names were cutting or cancelling theirs. It currently yields nearly 8%. The company has a fair value estimate of £40 per share, which is significantly above the current price of £28 per share.

For Morningstar I'm James Gard.

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James Gard  is content editor for Morningstar.co.uk