British American Tobacco’s (BAT’s) share price recovered slightly on Tuesday after dropping as much as 22% since January, largely spooked by the global derating of tobacco companies and rival Philip Morris’s poor financial performance.
Philip Morris’s share price plunged as much as 18% on Friday last week after its latest earnings report showed that $4.5bn spent on four new products was failing to win over new customers, according to a Bloomberg report.
"The problem with this business is primarily centred around valuation and sentiment," Gryphon Asset Managers portfolio manager Casparus Treurnicht said.
It is not just on the local bourse but also on the London Stock Exchange, where BAT has its primary listing, that the share price has dropped.
The share price has been trading in the lower echelons of its range, having reached what the Nasdaq flagged recently as "oversold". This is when a stock falls below 30 on the Relative Strength Index (RSI), a technical indicator tool used to measure momentum on a scale of zero to 100. BAT’s RSI reading hit 24.1 by Thursday last week.
It is not only BAT that has come under pressure. The entire tobacco industry is caught in the crossfire between healthy living trends and the uncertainty that clouds the science behind next-generation products.
The major factor was the global derating of global tobacco companies, with most of BAT’s US-listed peers down more than 20% over the past 12 months said Peter Takaendesa, portfolio manager at Mergence Investment Managers. Volume declines were being squeezed because of regulation, healthy living interest, competition and overcapacity.
Philip Morris recently reported that the decline in sales was worse than the company had expected.
Despite the rocky road, BAT has managed to consistently pay out dividends to shareholders, its most recent being a £0.49 payout.
"This places a big question mark over the sustainability of BAT’s model and how they will continue to pay those lofty dividends as they did in the past," said Treurnicht.
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