Evaluating the Risks and Rewards of British American Tobacco Investment

The primary reason to consider investing in British American Tobacco (NYSE: BTI) is its significant 7.1% dividend yield. This attractive yield stands in stark contrast to the broader market yield of approximately 1.2% and an average of 2.6% for consumer staples stocks, indicating that additional risks might be associated with British American Tobacco investments.

These risks become more apparent when examining one specific division of the company.

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Overview of British American Tobacco

British American Tobacco, as its name indicates, operates within the tobacco industry. It markets tobacco and various nicotine products through different delivery mechanisms. Notably, combustible tobacco products account for roughly 80% of its revenue, with cigarettes representing about 97% of the volume sold in this category. Thus, the company primarily identifies as a cigarette manufacturer.

Image source: Getty Images.

Tobacco is classified as a consumer staple, a category that generally contains products consumers purchase regularly, like toothpaste and food. However, nicotine products are technically a choice rather than a necessity, making their classification somewhat unusual. Despite this, the addictive quality of nicotine prompts consumers to continue purchasing cigarettes irrespective of external conditions, which can be advantageous for British American Tobacco in terms of stable cash flows supporting its dividend. In 2024, the adjusted earnings payout ratio stood at about 66%. While notably high, this level remains manageable, suggesting the dividend is likely safe in the near term.

Long-Term Prospects for British American Tobacco

The long-term challenge facing British American Tobacco is a persistent decline in cigarette volumes. In 2024, the volume dropped by 5%, following similar declines of 5.3% in 2023 and 5.1% in 2022. This trend is not exclusive to British American Tobacco, as many in the industry face similar hurdles.

Interestingly, British American Tobacco’s declines are significantly less severe compared to those of Altria (NYSE: MO), which reported a staggering 10.2% volume drop in 2024. It’s essential to consider, however, that Altria operates exclusively in North America. British American Tobacco’s fourth-quarter 2024 earnings report showed that its U.S. cigarette division also faced a substantial 10.1% volume decline, closely mirroring Altria’s situation.

Both companies have attempted to counteract declining volumes by raising prices. However, this strategy may have limitations, as continuous price increases could exacerbate volume declines over time.

Investors should monitor two main factors in British American Tobacco’s struggling U.S. market. First, it’s crucial to observe volume trends; a continuation of declines is unfavorable, and an acceleration would be detrimental. British American Tobacco’s international exposure offers some respite, but it also poses risks. Given that the U.S. market often sets social trends, it’s worth noting recent changes in British American Tobacco’s accounting, which suggests its U.S. brands could lose value within 30 years. If challenges in the U.S. begin impacting the company’s international markets, significant issues could arise. Keep a close eye on these developments.

High Yield Coupled with Significant Long-Term Risks

While British American Tobacco’s dividend appears secure for the time being, the ongoing decline in its core cigarette business may deter conservative investors. The rapid downturn in the U.S. sector could signal larger problems ahead. If these difficulties escalate, sustaining a high-yield dividend might become increasingly challenging over the long run.

Potential Second Chances for Investors

For those who feel they may have missed opportunities to invest in successful stocks, this might be the moment to re-evaluate.

Occasionally, our expert analysts identify a company worthy of a “Double Down” Stock recommendation, indicating a possible return on investment. If you feel past opportunities have slipped away, now could be the ideal time to invest before it’s too late:

• Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $244,570!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $35,715!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $461,558!*

At present, “Double Down” alerts are being issued for three remarkable companies, and there may not be another opportunity like this soon.

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*Stock Advisor returns as of April 5, 2025

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends British American Tobacco P.l.c. and recommends the following options: long January 2026 $40 calls on British American Tobacco and short January 2026 $40 puts on British American Tobacco. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.