British American Tobacco is one of the leading consumer goods companies in the world. It provides tobacco and nicotine products to millions of customers. Indeed, the company has a truly worldwide presence, operating in over two hundred markets.
Tobacco companies emerged as one of the most innovative companies recently as they embraced new products quickly. Consumer tastes change rapidly, and a company that fails to adapt as quickly as possible to these changes will be left behind.
British American Tobacco quickly expanded its product range from the classic combustible tobacco products to the modern and potentially reduced-risk products (e.g., vapour products, tobacco heating products, modern oral products, traditional oral products) while continuing to grow in the traditional tobacco market segment.
The aim is to continue to grow on the potentially reduced-risk products and new technologies while continuing to grow on the traditional combustible products.
British American Tobacco latest news
The tobacco industry, just like the automobile industry, is the one most disrupted in recent years. Levelling the field is challenging and requires plenty of investments. Luckily, British American Tobacco's financial resources allowed it to expand by adopting new products quickly and with much success.
However, the threat for the BAT comes not from internal problems. The coronavirus took the headlines at the start of 2020, and investors in the stock market suddenly realised that valuations are too high and unsustainable with the supply chains around the world broken.
As such, the wave of selling seen the last two days (e.g., Dow Jones in the United States dropped over two-thousand points in two days) is likely to be seen on other markets too, regardless of the name of the company and its financial results. Panic selling does not consider earnings, dividends, or sustainability of a business.
When it comes to macro analysis and a risk-off environment, panic selling drives the price action, and not long-term investing.
British American Tobacco share price history
The 2008 financial crisis halved the British American Tobacco share price – it dropped from $40 to $20 in a matter of months, following a meltdown in worldwide stock markets. It illustrates the principle of panic selling explained a bit earlier in this article. It rebounded with the world stock market as the Fed in the United States and other major central banks around the world began to pump money in the financial system to provide the much-needed liquidity.
This time BAT already dropped fifty per cent from its highs – starting a bearish trend way before the recent stock market rout began. It reflects the challenges of the tobacco industry in the last years as alternatives threatened its profitability.
British American Tobacco stock price analysis
One of the key factors that people consider when choosing to invest in this company is the business’ ability to pay a growing dividend in time. The main idea is to receive and reinvest the dividend while the BAT share price forecast remains positive.
This is a dividend-paying company – it paid out 45 per cent of its free-cash-flow as dividends last year or 74 per cent of its profits. It rewarded investors year-by-year with a dividend covered by both profits and cash flow. If earnings do not drop significantly, the dividend growth sustainability is not threatened.
The group is about to announce its earnings for 2019 at the end of this month, and the news might provide some relief to the negative sentiment surrounding financial markets. In any case, if we look at 2018 numbers, the revenue grew 25 per cent following 39 per cent and 13 per cent in the previous years, while profit from operations was on the rise as well. Investors will focus now on a continuation of these positive trends, as well as the dividend announcement based on the new earnings to be released.
However, dividend investing in a bearish market needs a longer-time horizon for the investment to pay-out. Hence, this time the earnings release might not have the same impact as otherwise would be the case.
British American Tobacco share price forecast for 2020
From a technical perspective, we can spot a five-wave structure on the BAT weekly chart. After a reversal pattern (i.e., double top around the $70 level), the second swing higher failed to make a new high. It indicates a potential fifth wave failure – an even more powerful formation that indicates a top is in place.
The five-wave structure that followed seems to belong to an A-B-C structure, a classic zigzag pattern. Moving forward for the rest of 2020, the British American Tobacco share price forecast looks bearish.
The focus now shifts to the lower edge of the rising channel. A break there and a break below the lows in wave A ($26) means that the C-wave is underway – another five wave structure.
The bottom line
2020 started with the world stock indices at all-time highs. The recent coronavirus outbreak changed everything; due to the implications it has on disrupting the supply chains.
However, it seems to be a demand shock rather than a supply shock, due to the fact that there is no inflation visible yet. If that is the case, the world’s central banks will step in and cut the interest rates even lower.
The one that stands out of the crowd is the Fed in the United States – it has one of the highest interest rates in the developed world (following Canada), hence more room to cut to sustain a recession.
The market seems to focus now on how to fight the virus' spread. Therefore, look for any possible bounce on the stock market to come from a combination of central banks' actions and news from organisations like WHO regarding the virus' evolution and potential cure.
If you do not want to make long-term investment commitments, but still want to try to profit from the price volatility, you can do so through contracts for difference (CFD) trading. Learn more about CFD trading with free online courses provided by Capital.com.
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