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Dividends are the principle attraction for buyers who purchase British American Tobacco (LSE:BATS) shares. Its addictive merchandise lead to strong money flows, the lifeblood of any firm’s dividend coverage.
British American’s raised annual dividends persistently for many years. It’s a pattern Metropolis analysts tip to proceed, which means dividend yields that comfortably beat the FTSE 100‘s 3.1% common.
If present projections are appropriate, a £20,000 funding in British American shares at present will ship whole dividends of £2,730 to the top of 2027.
But dealer forecasts are by no means set in stone. So how life like are present dividend projections? And extra broadly, ought to buyers contemplate including the tobacco titan to their portfolios?
Excellent news!
On the primary query, issues are wanting good on the dividend entrance. British American stays flush with money, illustrated by its dedication to substantial share buybacks.
Simply at present (9 December), the corporate introduced plans to repurchase one other £1.3bn value of fairness in 2026. Profitable debt discount can also be reinforcing these plans — British American expects leverage to drop to 2 to 2.5 occasions by the top of subsequent 12 months.
On the draw back, dividend cowl isn’t practically as strong because the steadiness sheet. And this creates some threat.
Anticipated payouts are coated between 1.4 and 1.5 occasions by anticipated earnings by means of to the top of 2027. Readings are far beneath the accepted safety benchmark of two occasions. They usually go away little room for error if income are blown off beam.
Is that this a dealbreaker for tobacco shares like this,although? I feel not. As soon as once more, the addictive nature of nicotine merchandise means earnings are unlikely to be blown far off beam from what brokers predict.
Certainly, weak dividend cowl has lengthy been a function of this reliable dividend grower.
So what’s fallacious?
The prospect of extra juicy dividends is actually interesting. However there’s much more to British American’s funding case than simply passive earnings.
And as cigarette utilization steadily declines, I’m aware that its share worth may steadily crumble. At the moment the agency repeated predictions of a 2% international tobacco market contraction in 2025.
Manufacturers akin to Fortunate Strike and Dunhill are serving to to maintain the wolf from the door in the intervening time. Accelerating demand for its non-combustible merchandise (like its Vuse vapes) can also be boosting the highest line. The corporate noticed a 2% rise in group gross sales in 2025.
Nevertheless it’s a matter of time earlier than worries over the gross sales outlook emerge, in my view. The world continues to maneuver in direction of a smokeless world, and new classes are beneath elevated scrutiny from regulators as nicely. There’s additionally an enormous drawback of business counterfeiting, particularly within the US.
Is British American a Purchase?
I don’t assume these dangers are baked into British American’s sky-high valuation. At £41.75, the corporate trades on a trailing price-to-earnings (P/E) ratio of 31 occasions.
That’s considerably above the five-year common of 13.5 occasions, and displays the corporate’s 42% share worth rise this 12 months.
I gained’t be shopping for British American shares myself. However it could be value contemplating for buyers who’re extra assured within the broader tobacco market.
