British American Tobacco: what to expect from its trading update

When is British American Tobacco’s trading update?

British American Tobacco is expected to release a trading update on 12 June, covering the first half of its financial year.

British American Tobacco’s results: what does the City expect?

As this is a trading update, there are no expectations for the results. However, City attention will focus on how the big tobacco firms such as British American Tobacco have been trading in a world that has seen declining smoking rates for a number of years. The fall in cigarette volumes has hit big tobacco firms hard, with both British American Tobacco and Imperial Brands seeing a drop of almost 50% in their shares.

To compound this decline, the Food and Drug Administration has proposed a ban on menthol cigarettes, a move that will hit British American Tobacco hard. British American Tobacco has a market-leading position in this particular type, including its Newport brand, which has a 14% market share. The ban would hit revenues in a dramatic fashion because 40% of British American Tobacco’s revenues come from the US, but the firm has got five years to come up with an alternative.

The switch to e-cigarettes will help British American Tobacco, in the long run. But it needs cash to keep developing and marketing these new products, and that cash has to come from its older products.

As a result, the firm has to fight back hard against new regulation. This however has been a losing battle, with the direction of travel clear for most investors. British American Tobacco retains its appeal as a dividend stock, for the time being. The yield has hit 7%, while the firm continues to pay out a majority of earnings as dividends. The worry will be whether a further decline in the share price, which will then push up the yield, will result in British American Tobacco looking favourably on a reduction in its dividend.

How to trade British American Tobacco’s trading update

Volatility in British American Tobacco shares hit a peak back in November 2018, hitting 124p. Since then, intraday volatility has declined, but the 14-day Average True Range (ATR) remains above the levels seen during the 2015 and 2016 gains. At 76p, the share price has seen a increase in volatility from the April lows.

British American Tobacco share price: technical analysis

British American Tobacco shares have fallen dramatically since the beginning of 2018. From a high of almost £48.00, the share declined to a low of £23.00. The price then rallied to £32.00, but failed to recover the late 2018 high above £34.00. A pullback from late March into the end of May has since found support at the rising trendline from the January low, producing a higher low. A push above £30.00 targets trendline resistance at £31.00.

In the short-term, a failure to hold £27.00 suggests a loss of the post-January rising trendline, which would bring £26.50 into view.

British American Tobacco’s tough future

It is not easy being a big cigarette maker these days. Imperial Brands is looking to sell off £2 billion of assets in order to drive investment in other parts of the business. It has already earmarked its premium cigar business as a potential sale, raising up to £1.5 billion.

British American Tobacco faces the same headwinds, as its traditional products see declining use and greater regulatory scrutiny. E-cigarettes continue to see growth, but there is a long way to go before these can completely replace traditional cigarettes. The firm continues to pay a solid dividend, and cash generation remains strong, so a cut looks to be an unlikely possibility.

From a chart perspective, the shares have recovered from their lows, but while they have outperformed the FTSE 100 so far this year (up 14% versus a 7% gain for the index), but on both a one year and a five year basis they are down by more than a fifth. At nine times forward earnings, the shares are below their five year average, which does provide a margin of safety for income investors.