It is no secret that the tobacco industry has been in a secular decline for decades. People worldwide are smoking less and less cigarettes every year, while vapes and non-combustible products have earned additional market share only for Philip Morris. The only way for other Big Tobacco companies like Altria and British American Tobacco to maintain sales has been by raising prices, but this is hardly a sustainable business model in the long term. No wonder their stock prices have lagged badly behind.
British American Tobacco reached an all-time high of 5644 pence a share in June, 2017, before losing 60% to 2233 in December, 2023. Currently in the vicinity of 2800, the share price seems to be making a timid attempt to recover. Would it be a successful one? The Elliott Wave chart below looks promising.
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The weekly chart of British American Tobacco shows a clear five-wave impulse to the upside between the year 2000 and mid-2017. It is labeled (1)-(2)-(3)-(4)-(5), where the five sub-waves of wave (5) are visible, as well. The Elliott Wave theory states that a three-wave correction follows every impulse. In this respect, the 2017-2023 bear market is not a surprise.
It can be seen as a simple (a)-(b)-(c) zigzag correction down to the 61.8% Fibonacci support level. The impulsive structure of wave (a) is marked 1-2-3-4-5. If this count is correct, the stock’s Elliott Wave cycle is complete. According to the theory, we can expect the uptrend to resume. Not to mention that British American Tobacco looks like a real bargain.
The company makes almost £9B in free cash flow a year, which it then uses to pay a very generous dividend to shareholders. Currently, the stock trades at less than 8 times FCF and offers an 8.5% dividend yield. A lot of things would have to go wrong before it turned out that 2800 pence a share was too high a price for British American Tobacco.
That being said, the markets offer plenty of opportunities to make money without investing in a company selling an addictive cancer-causing product. We believe we’ve found and included some of them in our stock portfolio.
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