British American Tobacco Stock: Hard to Resist 9.5% Dividends
- British American Tobacco (BAT) stock has outperformed the market, up 32% this year.
- The stock is nearing its all-time high, despite slowing growth.
- Technical indicators point to continued upside potential.
British American Tobacco (LON: BATS) has been one of the top performers in the FTSE 100 this year, with shares surging by 32%—far outpacing the index’s 10% rise. BAT has become a favored stock for investors seeking both growth and high dividends.
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Growth and Dividends
BAT’s strong performance mirrors that of other major tobacco companies. Altria, known for Marlboro, is up 36%, while Philip Morris International (PM) has risen nearly 40%.
This rally has come as ESG (Environment, Social, and Governance) concerns have faded, with many ESG funds losing billions in recent months. Tobacco stocks, once avoided due to their negative societal impact, are now seeing renewed interest.
BAT also remains attractive due to its generous dividends. With a 9.5% dividend yield, a £10,000 investment would generate £950 annually in dividends. Including dividends, BAT’s total return this year is up over 40%, well above the S&P 500’s 18% gain.
New Product Categories Drive Growth
BAT’s success is even more impressive given the challenges it has faced. Last year, the company shocked the market with a $31.5 billion write-down of its U.S. business, citing a slowing economy, a shift to vaping, and increased competition.
Despite these setbacks, BAT’s stock has continued to climb. Its latest financial results show revenue dropped 8.2% to £12.34 billion, even though the number of consumers using smokeless products rose to 26.4 million. Revenue from its vape and non-combustible products fell 0.4% to £1.65 billion, while operating profits slumped 28.3% to £4.2 billion.
The tobacco industry is grappling with slow global growth, especially among younger generations, who are less inclined to smoke. BAT’s U.S. business saw an 8.5% drop in revenue from combustible products in the first half of the year, while revenue outside the U.S. grew by just 2.2%.
On a brighter note, BAT’s new categories, including vaping, now represent 18% of its total revenue. The company expects this figure to continue rising as it shifts focus from traditional tobacco products.
Attractive Valuation but Risks Persist
BAT has a compelling valuation, trading at a forward non-GAAP P/E ratio of 8.3, lower than the industry average of 18. Its GAAP P/E is also lower, at 10, compared to the industry’s 20.
However, tobacco companies often face lower valuations due to their slow growth and the negative perception of the industry.
BAT faces two key risks. First, the sustainability of its growth in new categories remains uncertain. Second, the overall decline in cigarette consumption, particularly among younger consumers, could weaken long-term growth.
British American Tobacco Stock Analysis
From a technical perspective, BAT stock has been in a strong bull market this year, rising from 2,076p in January to nearly 3,000p.
The stock formed a golden cross pattern, where the 50-day moving average crosses above the 200-day—a historically bullish signal. Additionally, BAT has formed a cup and handle pattern, another positive indicator. Based on these signals, the stock is likely to continue rising, with bulls targeting the 3,023p level. After consolidating, BAT may resume its uptrend.
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