People skip tobacco stocks for a variety of reasons. Some are turned away by the stigma of companies selling a harmful product. Others want more upside than what tobacco stocks have delivered in recent years. Open-minded investors might be surprised to hear what British-American tobacco (NYSE: BTI) can offer.
Don’t expect the stock price 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 like the stock today and into the future. 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 many capital gains over the past decade, but the dividends are famous. British American Tobacco is yielding a whopping 8.3% at its recent share price, more than what investors will find from other sources. High returns 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 estimate that British American Tobacco will earn about $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 unexpectedly dry up. Yet that is unlikely; Nicotine’s addictive properties have made tobacco companies quite resilient. Investors can use the dividend to pay living expenses or reinvest it to buy more shares of British American Tobacco or another stock.
2. Rate reductions
The dividend is the main reason to own British American Tobacco, and changes in the economy’s interest rates affect that dynamic. The Federal Reserve recently announced a 50 basis point cut in the Federal Funds Rate, the benchmark interest rate for the U.S. economy. Depending on how the economy performs, there could be further rate cuts in the future.
When interest rates fall, this affects the return that people can generate on, for example, high-yield savings accounts. Lower interest rates could make high-yield dividend stocks, such as British American Tobacco, more attractive. A reliable, high-yield stock has more value when interest rates are low.
3. Success in smokeless products
As smoking gradually declines, tobacco companies are switching to smokeless products, including electronic cigarettes (vapes), non-burning tobacco devices and oral nicotine pouches. It’s essentially a race to move from the past to the future, and British American Tobacco is doing it right. Smokeless products represented 17.9% of total sales in the first half of 2024.
I would say competitor Philip Morris International has better smokeless product brands, such as Zyn brand Iqos and Marlboro, but that’s okay. British American Tobacco is making real progress with its brands and is doing much better than Altriawhich is still mainly dependent on flammable products for its activities.
4. The price makes a lot of sense
Ultimately, British American Tobacco could grow faster as the company’s makeup shifts from the declining cigarette business to the growing smokeless group. That transition will take years, so it’s not something we need to think about today. However, short-term growth matters, and British American Tobacco can deliver. Analysts expect the company to grow earnings about 4% annually over the next three to five years. It matters because it can drive annual dividend increases without changing the financial math.
Moreover, 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 based on 2024 earnings estimates. S&P500 has a price/earnings ratio of 21, so the market has slim expectations for British American Tobacco.
Slow growth is okay if the price makes sense.
That sounds like a better deal:
Company B does Costco Wholesale. I don’t know about you, but I’d rather buy Company A, British American Tobacco.
Get everything straight
All stocks are risky to some degree, but the fact that British American Tobacco is trading at a valuation in line with the growth of the economy reduces the chance that investors will experience a catastrophic price drop.
British American Tobacco won’t be the right stock for everyone. It’s unlikely that modest amounts of money can be turned into millions, and dividends would have to be pretty high on your priority list for you to be interested in this. That said, the right investor will struggle to find better high-yield dividend stocks to buy and hold without losing sleep.
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Justin Pope holds positions at Philip Morris International. The Motley Fool holds positions in and recommends Costco Wholesale. The Motley Fool recommends British American Tobacco Plc 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.
4 Reasons to Buy British American Tobacco Stock Like There’s No Tomorrow was originally published by The Motley Fool
