As we progress through our £10-a-week Dividend Pie investment challenge, British American Tobacco (LSE: BATS) emerges as our Week 8 selection after yesterday’s release of annual results, but most importantly, their commitment to pay 60.06p for the following four quarters, that is rising by 2% last year and yielding at the current price of £31.00 around 7.75%. This globally renowned tobacco giant offers an attractive dividend yield, a resilient business model, and steady cash flow, making it a strong choice for our dividend stocks investment challenge.
Just before we jump to review the stock, we wanted to remind you that we are also running a growth stocks challenge in parallel. Now, lets go for this week’s choice, BATS.
Why British American Tobacco?
British American Tobacco (BATS) is one of the largest tobacco companies in the world, with a diverse portfolio of cigarette brands, next-generation nicotine products, and a robust presence in multiple international markets. The company continues to generate substantial revenue despite global regulatory challenges, thanks to its strong market position and innovative product offerings.
As of February 14, 2025, BATS shares are trading at approximately £31.00 with an impressive dividend yield of 7.75%, making it one of the highest-yielding FTSE 100 stocks and also one of the biggest yields on our dividend portfolio, just below the cannabis REIT stock that it is yielding still over 10%.
Dividend Overview
Our “£10-a-week Dividend Pie” is built on selecting stocks with consistent and attractive dividends. British American Tobacco stands out in this regard:
- Current Dividend: The company offers an annualised dividend of £2.40 per share, distributed quarterly as 60.06p every time.
- Yield: A substantial yield of 7.75%, which provides a solid passive income stream.
- Payout Date: The next ex-dividend date is expected in March 2025, with a payment scheduled for May 2025. Purchasing before the ex-dividend date ensures eligibility for the upcoming payout. Please remember when you have to buy a stock to get a dividend.
Dividend Growth & Sustainability
British American Tobacco has a strong history of maintaining and growing its dividend payments. Over the last decade, the company has increased its dividend per share consistently, reflecting a commitment to shareholder returns.
Key factors contributing to BATS’ dividend sustainability include:
- Consistent Cash Flow: The company generates billions in revenue annually, allowing stable dividend distributions.
- High Profit Margins: With operating margins exceeding 40%, BATS maintains a highly profitable business model.
- Strategic Diversification: BATS is investing in reduced-risk products (RRPs) like vapes and heated tobacco, which will drive future growth and that was the focus yesterday, they are looking to get 100% of their revenue from a smokeless business by 2035 while currently is around 17% of the business.
Is British American Tobacco a Good Dividend Stock?
For investors seeking high-yield stocks in the UK, British American Tobacco remains a top choice. Here’s why:
- Strong Defensive Stock: The tobacco industry remains resilient, even during economic downturns.
- Growing Next-Generation Portfolio: BATS is adapting to changing consumer preferences with a focus on non-combustible nicotine products.
- Reliable Dividend Payout: A long-standing history of dividends makes it an attractive option for passive income investors.
- Undervalued Stock: Trading at a price-to-earnings (P/E) ratio of 7, BATS remains undervalued relative to its cash flow and earnings.
Risks to Consider
While BATS offers excellent dividend income, investors should be aware of potential risks:
- Regulatory Challenges: Governments worldwide continue to impose strict regulations on tobacco advertising and sales. The most recent was said on the earnings call where they disclosed a £6.2 billion provision after legislation in Canada enabled provincial governments to recover healthcare costs directly from tobacco manufacturers.
- Declining Cigarette Sales: Traditional cigarette sales are in a long-term decline, though offset by the rise of alternative nicotine products, so hopefully they can cover the earnings with this.
- Currency Fluctuations: As a global company, BATS is exposed to forex risks, which can impact revenue and profits.
Should You Buy British American Tobacco Stock?
Investing in British American Tobacco is a decision that depends on your investment goals. If you are looking for high-yield dividend stocks with strong cash flow and a defensive business model, BATS is worth considering. The stock offers stability, even during market downturns, and has a long history of rewarding shareholders through dividends. However, investors should be aware of regulatory risks and the decline in traditional cigarette sales.
Just looking at some of the analysts price target for British American Tobacco, the average is £32.69 with a high of £39 and a low of £25, so there is a tendency on the upside potential.
Long-term investors focused on passive income may find BATS appealing, while growth-focused investors might prefer stocks in expanding industries. Conducting your own due diligence is key before making an investment decision.
British American Tobacco Stock Forecast
Looking ahead, analysts predict British American Tobacco stock could see moderate growth due to its focus on next-generation products and continued expansion into emerging markets. The company is shifting its business model towards vapes and heated tobacco, which are expected to drive revenue in the coming years.
Despite regulatory headwinds, BATS maintains strong profitability, and many analysts believe the stock remains undervalued. If the company successfully transitions its portfolio towards reduced-risk products, it could sustain dividend growth and provide solid long-term returns.
On the earnings call, they have also announce a share buyback of £900 million in 2025 which is more than the £700 million executed last year. For those that don’t understand share buyback, it is usually a way of rewarding shareholders, as they will buy shares, reducing the number of shares outstanding which also increases stock price.
The conclusion
British American Tobacco (BATS) is a compelling dividend stock with an attractive yield, strong financials, and a strategic shift towards next-generation nicotine products. Its resilience, profitability, and consistent dividend payments make it an excellent addition to our “£10-a-week Dividend Pie” investment challenge. So hopefully it adds value to our portfolio and offers a good performance. If you missed it, we reviewed first month performance on dividend stocks.
Lastly, as always, investing carries risks, and it’s advisable to conduct thorough research or consult a financial professional before making decisions. This challenge represents our personal investment journey and is not financial advice.
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