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Personally, I don’t buy cigarette maker stocks, which means I haven’t looked closely. British American Tobacco (LSE:BATS) shares for some time. If I had bought them, I would have bought this FTSE 100 dividend stock a long time ago.
It offers one of the highest yields on the index, while it trades at one of the lowest valuations. It seems to be a permanent position, not one that I would expect to change.
how time changes
Attitudes towards smoking have changed dramatically in my lifetime. I remember my parents’ Christmas Day parties in the 1970s, when neighbors filled our house with perfume and cigarette smoke. Today, if they smoke, they will be forced to blow their mouth at every step.
Smoking has declined in the West as decades of health campaigns have done their job, but it’s a different story (at least for now) in the developing world.
The investment case for British American Tobacco is that it will capture a larger share of a shrinking market thanks to its strong brands and acquisition strategy. It seems to be going well. Total revenue in 2018 was £24.49 billion. By 2022, this has increased to £27.66 billion. That’s a cumulative growth of 12.9%, which is steady if not spectacular.
Over the same five-year period, pre-tax profits rose from £8.35bn to £9.23bn. Here the cumulative increase is 11.66%.
Throughout that period, the dividend has grown steadily, which is exactly what investors want to see. British American Tobacco paid 203p per share in 2018, having risen to 217.8p last year. This is a cumulative 7.29%. Again, stable but not spectacular.
Few long-term investors will complain because the shares now offer an astonishing 8.3% return, which covers 1.7 times earnings. Given the expected yield is over 9.3%, the cover at 1.6x would remain strong. The consensus suggests that management will increase the dividend per share to 242p in 2023, an increase of 11.1%.
Based on that rate, I would need to buy 496 shares to generate my income target of £1,200 over the next year. At today’s share price of £26.26 it would be worth £13,025 to me.
a high and growing income
My maximum limit for any single stock purchase is £5,000 in order to maintain diversification, but given the relative safety of British American Tobacco yields, I would be tempted to make an exception here. If I bought tobacco stocks, ie.
Even an investment of £5,000 would generate an income of over £450 per year. The dividend per share is forecast to reach 2.54p in 2024, rising to £485 next year and with luck continuing to climb thereafter. This is a stock to be held for the long term so that the dividends have time to compound.
Of course, dividends are never guaranteed. However, with British American Tobacco, my capital is at greater risk. The share price has declined 31.62% in five years and 23.88% in last 12 months. This is considered a defensive sector, but that hasn’t protected investors from a broader market selloff.
The company has growth opportunities, primarily in vaping, but the real attraction is income. I’d love to have a piece of that, but investment decisions are highly individual, and I’m going to pass on the example. Shame.
The post 495 Extremely Cheap British American Tobacco Shares Will Make Me £1,200 a Year in Income appeared first on The Motley Fool UK.
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Harvey Jones has no position in any of the stocks mentioned. The Motley Fool UK recommends British American Tobacco plc The views expressed on the companies mentioned in this article are those of the author and may therefore differ from official recommendations made in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a wide variety of insights can make us better investors.
Motley Fool UK 2023
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