People skip over tobacco stocks for several reasons. For some, the stigma of companies that sell a harmful product turns them away. Others want more upside than what tobacco stocks have delivered in recent years. However, open-minded investors may be surprised to learn what British American Tobacco(NYSE: BTI) can offer.
Don't expect the stock to double or triple anytime soon. In fact, the share price is down more than 30% from a decade ago.
But despite its poor past performance, there are many reasons to love the stock today and in the future. Here are four reasons to buy British American Tobacco like there's no tomorrow.
1. An 8.3% dividend yield
Tobacco stocks haven't produced much capital gains over the past decade, but the dividends are famous. British American Tobacco yields a whopping 8.3% at its recent share price, more than what investors will find from other sources. High yields are a common warning sign for most stocks, but tobacco companies are an exception because they generally don't need much reinvestment and can pass most of their profits along to shareholders.
Analysts estimate that British American Tobacco will earn approximately $4.60 per share this year and pay $2.93 in dividends. That's a dividend payout ratio of 63%, which leaves a big cushion in case profits dry up unexpectedly. Still, that's unlikely; nicotine's addictive properties have made tobacco companies quite resilient. Investors can use the dividend to pay for living expenses or reinvest it to buy more shares of British American Tobacco or another stock.
2. Rate cuts
The dividend is the primary reason to own British American Tobacco, and changes in the economy's interest rates impact that dynamic. The Federal Reserve recently announced a 50-basis-point reduction to the federal funds rate, the benchmark interest rate for the U.S. economy. Depending on how the economy performs, there could be more rate cuts in the future.
When interest rates fall, it impacts the yield people can generate in places like high-yield savings accounts. Lower interest rates could make high-yield dividend stocks, like British American Tobacco, more appealing. A dependable, high-yield stock has more value when rates are low.
3. Success in smokeless products
As smoking gradually declines, tobacco companies are shifting to smokeless products, including electronic cigarettes (vapes), heat-not-burn tobacco devices, and oral nicotine pouches. It's essentially a race to transition from the past to the future, and British American Tobacco is doing well. Smokeless products were 17.9% of total sales in the first half of 2024.
I'd say competitor Philip Morris International boasts better smokeless product brands, such as Zyn and Marlboro-branded Iqos, but that's OK. British American Tobacco is making genuine strides with its brands and is faring far better than Altria, which still depends primarily on combustible products for its business.
4. The price makes a ton of sense
Eventually, British American Tobacco may grow faster as the company's composition shifts from its declining cigarette business to its growing smokeless group. That transition will take years, so it's not something that needs to be top of mind today. Short-term growth matters, though, and British American Tobacco can deliver. Analysts expect the company to grow earnings by about 4% annually over the next three to five years. It matters because that can fuel annual dividend increases without changing the financial math.
Additionally, it helps justify buying the stock at its current price. British American Tobacco trades at a price-to-earnings ratio (P/E) of 7.6 using 2024 earnings estimates. The S&P 500 has a P/E ratio of 21, so the market has meager expectations for British American Tobacco.
Slow growth is OK when the price makes sense.
Which sounds like a better deal:
- Company A: growing earnings by 4% and trading for less than 8 times earnings.
- Company B: growing earnings by 9% and trading for nearly 50 times earnings.
Company B is Costco Wholesale. I don't know about you, but I'd rather buy Company A, British American Tobacco.
Putting it all together
All stocks are risky to some degree, but the fact that British American Tobacco trades at a valuation appropriate for its pedestrian growth reduces the odds that investors endure a catastrophic price decline.
British American Tobacco won't be the right stock for everyone. It's unlikely to turn modest sums of money into millions, and you must have dividends pretty high on your priority list to have interest here. That said, the right investor will struggle to find a better high-yield dividend stock they can buy and hold without losing sleep.
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Justin Pope has positions in Philip Morris International. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool recommends British American Tobacco P.l.c. and Philip Morris International 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.
