4 reasons to buy British American Tobacco stock like there’s no tomorrow

People skip tobacco stocks for a number of reasons. For some, the stigma of companies selling a harmful product repels them. Others want more than what tobacco stocks have offered in recent years. However, open-minded investors may be surprised to learn what British American Tobacco (BTI -0.26%) can offer

Don’t expect the stock to double or triple anytime soon. In fact, the stock 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 going forward. Here are four reasons to buy British American Tobacco like there’s no tomorrow.

1. A dividend yield of 8.3%.

Tobacco stocks haven’t produced much capital gain over the past decade, but dividends are famous. British American Tobacco has a stunning 8.3% yield on 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 on most of their profits to shareholders.

Analysts forecast that British American Tobacco will earn about $4.60 per share for the current year and will pay a dividend of $2.93. That’s a dividend payout ratio of 63%, which leaves a big cushion in case profits unexpectedly dry up. However, it is unlikely; The addictive properties of nicotine 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 other stocks.

2. Tariff reductions

Dividends are the main reason to own British American Tobacco, and changes in interest rates in the economy influence this dynamic. The Federal Reserve recently announced a 50 basis point cut in the federal funds rate, the benchmark interest rate for the US economy. Depending on how the economy performs, there could be more rate cuts in the future.

When interest rates fall, that impacts the return people can generate in places like high-yield savings accounts. Lower interest rates could make high-yielding dividend stocks like British American Tobacco more attractive. A reliable, high-yielding stock has more value when rates are low.

3. Success in smokeless products

As smoking gradually declines, tobacco companies are switching to smokeless products, including electronic cigarettes (vapes), smokeless tobacco devices and oral nicotine pouches. It is essentially a transition race from the past to the future, and British American Tobacco is doing well. Smokeless products accounted for 17.9% of total sales in the first half of 2024.

I would say competitor Philip Morris International it boasts better smokeless brands like Iqos, Zyn brand and Marlboro, but that’s okay. British American Tobacco is making real strides with its brands and is doing much better than Altriawhich still depends primarily on fuel products for its activity.

4. Price makes a ton of sense

Finally, British American Tobacco could grow faster as the company’s makeup 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. However, short-term growth matters and British American Tobacco can deliver. Analysts expect the company to grow revenue 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.

Plus, it helps justify buying the stock at the current price. British American Tobacco trades at a price-to-earnings (P/E) ratio of 7.6 using 2024 earnings estimates. The S&P 500 it has a P/E ratio of 21, so the market has weak expectations for British American Tobacco.

Slow growth is OK when the price makes sense.

Which sounds like a better deal:

• Company A: Up 4% in earnings and trading for less than 8 times earnings.
• Company B: Earnings up 9% and trading at 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 commensurate with its pedestrian growth makes it less likely that investors will endure a catastrophic price drop.

British American Tobacco won’t be the right stock for everyone. You’re unlikely to turn modest amounts of money into millions, and you have to have dividends pretty high on your priority list to have interest here. That said, the right investor will struggle to find a better high-yielding dividend stock that they can buy and hold without losing sleep.