When it comes to the realm of investing, tobacco stocks have long been revered for their robust dividend payouts. British American Tobacco (NYSE: BTI) fits snugly in this category with a tantalizing dividend yield of 9.8%. However, with smoking habits on a decisive downtrend, the question looms large – is this stock a fortress of wealth, or merely a disguised snare for unsuspecting investors?
Exploring the Case for Acquiring British American Tobacco Shares
Undoubtedly, the primary allure for most investors lies in the stock’s remarkable dividend yield. At 9.8%, it stands as a beacon of hope among a sea of diminishing yields. Yet, British American Tobacco opts for a more dynamic approach to dividend payout, pivoting around its financial performance and overall business health.
As of 2023, the company boasted a dividend payout ratio of 60%, having distributed 5.1 billion pounds in dividends out of 8.4 billion pounds in free cash flow.
However, the stock’s charm extends beyond its generous dividends. British American Tobacco has demonstrated a knack for diversification, venturing into new horizons such as Vuse e-cigarettes and Velo nicotine pouches. In 2023, revenue from these novel products surged by an impressive 15.6% to 3.35 billion pounds, propelling the company to achieve a solid constant currency growth of 1.6%.
While traditional cigarettes still constitute the lion’s share of revenue at 22.1 billion pounds out of a total of 27.3 billion pounds, the foray into new categories marks a promising trajectory for British American Tobacco.
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Unpacking the Arguments Against Holding British American Tobacco Stock
In a startling move that left investors reeling, British American Tobacco announced a staggering impairment charge of approximately $31 billion on its U.S. cigarette brands in December. This write-down primarily pertained to brands acquired from R.J. Reynolds, including Camel and Newport, reflecting the adverse macroeconomic conditions in the U.S. and the company’s vision of a smokeless future.
This write-down casts a shadow of doubt on the fate of tobacco products, particularly in the U.S., where stringent regulations and changing consumer preferences are reshaping the industry landscape for good.
Furthermore, the stock’s performance paints a bleak picture. Trading at a nearly decade-low and having plummeted by 45% over the past ten years, British American Tobacco exudes a scent of dwindling value, despite the cushion of its dividend returns.
Reasons to Keep British American Tobacco Stock in Your Portfolio
Amidst the storm of uncertainties that enshroud British American Tobacco’s future, a glimmer of hope shines through. While the new products segment remains modest, it shows robust growth potential, following in the successful footsteps of industry peers like Philip Morris in pioneering next-gen products.
Moreover, the stock’s hefty dividend acts as a balm for patient investors, while cigarette sales, though on a decline, do not mirror the dire straits painted by the $31 billion write-down. Organic cigarette sales dipped by 5.3% to 555 million units, but in constant currency terms, the decrease stood at just 0.8% to 22.8 billion euros.
The Final Verdict: Hold on to British American Tobacco Stock
It’s undeniable that British American Tobacco faces headwinds from the waning smoking culture. Yet, trading at merely six times trailing free cash flow and approximately four times trailing adjusted operating profits, the stock offers adequate inducement to stand firm.
While British American Tobacco may not dazzle with extraordinary market outperformance, the risk of a precipitous stock nosedive appears remote, given the semblance of stability in its core business.
Affirmatively, British American Tobacco stock merits a place in investors’ portfolios.
Contemplating a $1,000 Investment in British American Tobacco
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Jeremy Bowman holds no position in any of the stocks mentioned. The Motley Fool recommends British American Tobacco P.l.c., Philip Morris International, and suggests the options of long January 2026 $40 calls on British American Tobacco and short January 2026 $40 puts on British American Tobacco. The Motley Fool adheres to a disclosure policy.
The perspectives expressed herein belong to the author and do not necessarily align with those of Nasdaq, Inc.
