So, get this: shares of British American Tobacco (NYSE:BTI) took a colossal hit, like a linebacker tackle, yesterday. The reason? The company announced that it’s going to slash the value of its U.S. cigarette brands by a jaw-dropping $31 billion, all because of the turmoil in the U.S. smokable market. This bombshell rang the opening bell on the stocks as they tumbled 9%. But hold up, because this may just be your golden ticket – a buying opportunity in the making! In my opinion, this nosedive in British American Tobacco’s share price is overblown. Why? Well, because despite the earth-shattering news, the company assured everyone that its EPS growth target remains unscathed. And, guess what? The dividend too is like a sturdy ship on calm waters after this turbulence. So, if you’re into snagging a 6X P/E valuable stock, now’s the time to roll up your sleeves and dive right in!

Previous rating

I gave a thumbs up to British American Tobacco in the third quarter because their vape products, under the Vuse banner, were killing it in the market. The revenue and gross margin were spinning like a DJ on a Saturday night. But guess what happened yesterday? Shares of British American Tobacco took a heavy beating as the market totally overreacted to a trading update that laid out the company’s plan to write off the value of its U.S. cigarette brand holdings. But here’s the kicker – since the dividend isn’t at risk, I’m going all-in on BTI’s shares!

British American Tobacco takes $31B impairment, EPS guidance and dividend are unaffected

So, British American Tobacco spilled the beans in a new filing with the stock exchange that, due to the ongoing heat in the U.S. smokable market, it decided to slash down the value of its cigarette brand holdings by a staggering £25 billion, which crazily translates to about $31 billion. The dagger, in this case, is aimed at U.S. cigarette brands like Camel, Lucky Strike, Newport, and others, acquired by British American Tobacco in 2017 through the $49 billion Reynolds American acquisition.

This infusion of brands gave BTI’s equity and assets a jolt at the time. But now, British American Tobacco’s book value, currently cruising at over $91 billion, is going to get slammed (by the same amount) once the impairment charge lands. Let’s call it like it is – from a risk angle, brace yourselves for more write-downs and BTI possibly making strategic moves for its leftover U.S. cigarette brands.

This impairment charge is a bitter pill for British American Tobacco as it’s the first time a major tobacco company is downsizing the worth of its core tobacco investments in the smokable market. It’s pretty clear that the management sees a long winter ahead for the traditional cigarette market. We’ve all heard the whispers about the headwinds including a shrinking smoker population, which is putting the squeeze on industry cigarette volumes, and tighter regulations making it harder for tobacco companies to rake it in.

In truth, almost all the cash flow growth that companies like British American Tobacco or Altria (MO) are seeing is hitching a ride on the back of unconventional product categories like vape products, heated tobacco sticks, or nicotine pouches. British American Tobacco let the cat out of the bag yesterday, revealing its plan to haul in 50% of its revenues by 2035 from non-traditional tobacco products.

So, here’s the lowdown from British American Tobacco’s filing: 1) U.S. cigarette brands are burning out in the long run and it’s likely that other tobacco bigwigs will follow suit and slash the value of their cigarette portfolios, 2) BTI might turbocharge its switch to non-traditional products and think about offloading its remaining U.S. cigarette brands, and 3) The impairment charge is like a gust of wind – it won’t crimp British American Tobacco’s earnings growth. The tobacco giant is still bullish on locking in mid-single figure adjusted diluted EPS growth in FY 2023 (in constant currency terms).

Hang on, because BTI pays out less than 50% of its earnings, I reckon the dividend (and the 10% yield) are in the clear after the impairment shocker. In comparison, in the last year, Altria had a cash dividend payout ratio of 79%. Yikes!

Buy the panic: get a 10% yield + a 6X P/E value stock

So, ever since British American Tobacco’s ADR price got smacked down by 9% yesterday, dividend buffs have a chance of a lifetime to swoop in on this exaggerated tailspin. Shares of British American Tobacco are like a clearance sale, priced at 6.3X FY 2024 earnings and are dangling a mouth-watering 16% earnings yield. BTI is now trading 17% below its 1-year average P/E ratio and a whopping 22% below Altria’s P/E ratio.

Fact of the matter is, the impairment is just like a piece of fiction – a non-cash accounting affair that won’t play havoc with BTI’s dough or cash flow. So, the price plunge is the golden ticket for aggressive buyers, in my book. I reckon British American Tobacco could comfortably rock a 8-9X forward earnings tag given that the tobacco titan backs its dividend with solid profits. A 8-9X P/E ratio hints at a 35% upside potential and, smack in the middle, a more restrained earnings yield of 12%.

Risks with British American Tobacco

British American Tobacco continues to brace for heavier fire on its U.S. combustible business as the smoking crowd thins out and Uncle Sam gears up to lower the nicotine levels in cigarettes. There’s even talk of banning menthol cigarettes altogether in 2024. Brace yourself – British American Tobacco and other tobacco leviathans may have more impairment tsunamis heading their way.

Final thoughts

Here’s the real talk: investors might be overcooking British American Tobacco’s announcement from yesterday considering the FY 2023 EPS growth forecast and the dividend are standing tall. British American Tobacco is sitting pretty in the vapor market, like a cool cat chilling on a sunny perch, and is roaring ahead. In my playbook, dividend investors are holding a Trump card here – a knockout deal to jump on the downturn and fork out BTI into their portfolios. Given that British American Tobacco is also dealing a 6X P/E pitch (16% earnings yield), I’m diving deep and am bagging BTI’s shares like there’s no tomorrow!