New nicotine products have taken the United States by storm over the past decade. These include e-vapor devices (vapes) and nicotine pouches. Traditional tobacco companies have invested in this sector and acquired start-ups with varying degrees of success. In recent years, the vaping sector has been disrupted by disposable devices, mainly from abroad. Although these products are not approved by the U.S. government and are technically illegal, they have captured a large market share, which means headwinds for owners of other vape brands.
Now the US government and law enforcement agencies say they will finally crack down on stores selling these illegal disposable vapes. What does that mean for the nicotine giant British-American tobacco (NYSE: BTI) and the ultra-high dividend yield of almost 10%? Let’s take a closer look and find out.
Crackdown on illegal vaping devices
On Monday, June 10, the Federal Drug Administration (FDA) and the Department of Justice said they would work with multiple law enforcement agencies across the United States to remove illegal vaping devices from store shelves. There have been government announcements ordering supermarkets to stop selling these devices, but given their profitability there has been minimal change so far. With potential enforcement actions underway, you’ll likely see stores pulling these devices from their shelves.
This should benefit British American Tobacco, which is one of the few owners of approved vaping devices in the United States under the Vuse brand. Despite these headwinds, British American Tobacco’s vapor segment sales grew 27% in 2023 (it also sells these products internationally). Add to that the fact that nicotine pouch’s biggest competitor – Zyn – is currently experiencing product shortages, and British American Tobacco’s new nicotine brands should do well this year.
Last year, these new categories generated a combined $4.22 billion in revenue, using the current conversion from British Pounds to US Dollars. Nicotine pouch sales grew by 39% last year, demonstrating just how promising this product category is. Since 2019, sales of the entire new nicotine products segment for the company have increased 28% annually.
Now the segment is finally generating profits. Last year, the segment reached approximately breakeven as its operations expanded around the world. If sales continue to grow and profit margins continue to expand, the segment could achieve nearly $10 billion in annual revenue and several billion in operating profit in the coming years. These are profits that do not fit within British American Tobacco’s operating profit and price-earnings ratio (P/E).
The stock is cheap, but is the dividend sustainable?
Clearly, the crackdown on illegal vaping and the current shortage of Zyn can help British American Tobacco by 2024. But what about the legacy tobacco business?
Volumes are declining rapidly, but this is being compensated by price increases of cigarette brands such as Newport and Camel. In fact, free cash flow per share has increased by 20% over the past five years, even without profit contributions from new nicotine categories. Over the last twelve months, British American Tobacco generated $5.30 in free cash flow per share. This is significantly above the dividend per share of $2.90, which alleviates concerns that the 9.5% dividend yield will be cut soon.
Free cash flow per share should grow over the next five to 10 years, even as the tobacco industry struggles as new nicotine categories finally start contributing to free cash flow. In fact, I think it’s likely that British American Tobacco will to grow dividend per share significantly over the next ten years. For that reason, the stock looks like a great buy for income-oriented investors at these prices.
Should You Invest $1,000 in British American Tobacco Now?
Before you buy shares in British American Tobacco, consider the following:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and British American Tobacco wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $808,105!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns June 10, 2024
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool recommends British American Tobacco Plc 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.
Is this huge news for this ultra-high dividend income stock? was originally published by The Motley Fool
