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This Week’s Top Blue-Chip Income Buy: British American Tobacco plc

I’m always on the lookout for big FTSE 100 companies when they’re being offered in the market at an attractive valuation for dividend investors. A little higher yield at the time you buy can make a big difference to the growth of your income stream over the long term. Right now, I reckon British American Tobacco (LSE: BATS) (NYSE: BTI.US) is looking a great buy for income.

Emerging markets

British American Tobacco (BAT) sailed through the financial crisis and recession, continuing its long record of annual double-digit earnings increases. However, earnings growth moderated to 6% last year, and analysts see a rise of the same order this year.

Companies such as BAT, with their growth engines in emerging markets, have come under pressure lately, due to concerns about less dynamic growth in these developing regions. BAT’s shares are 5% below the level they were at three months ago, and 12% down on their high for the year.

A great opportunity right now

At the time of writing, BAT is trading at 3,322p and the trailing 12-month dividend yield has risen to 4.1%. As a result of the weakness of the shares in recent weeks, you have to go back to last year to find the market offering BAT on as high a trailing yield.

The company’s current 6% rate of earnings-per-share (EPS) growth may be lower than in past, but it is, nevertheless, sufficient to support dividend increases comfortably ahead of inflation — and to extend BAT’s history of delivering a real rising income every year since at least the turn of the millennium.

Looking ahead, analysts are expecting BAT to increase this year’s dividend by 6.6% and are forecasting 7.7% growth in both EPS and the dividend for 2014. The forward 12-month yield works out at 4.6%, over a percentage point ahead of the FTSE 100 average.

I don’t believe the long-term story of emerging-markets growth has terminally stalled. I feel confident that BAT — the most international of tobacco companies — will continue to benefit from increasing wealth and brand consciousness among consumers in developing economies. Hence, with the recent share-price weakness pushing up the dividend yield, I rate BAT a great buy for long-term income investors right now.

Another top income opportunity

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> G A Chester does not own any shares mentioned in this article.