Although the recent fall of the SSE share price has delivered a high dividend yield, the energy firm has experienced challenging trading, so I’d avoid the stock.
Instead, I’m attracted to smoking products manufacturer British American Tobacco (LSE: BATS) and its dividend yield, which runs close to 7% at the current share price near 3,060p.
But the stock suffered its own plunge recently too, and today languishes around 45% below the peak it attained two summers ago. That’s why we are seeing such a high yield now, but I reckon the firm’s business looks in good enough shape to sustain dividend payments in the years ahead.
A fast-growing category within the business
Indeed, City analysts following the FTSE 100 giant have pencilled in mid-to-high single-digit percentage increases for the dividend during the current trading year and in 2020. And the half-year results report the firm delivered on 1 August puts some weight behind those analysts’ predictions.
The story behind BATS for several years now has been one of gradually declining cigarette volumes being offset by rising sales from a new generation of products. The report reveals to us that in the first six months of the year, overall adjusted revenue rose just over 4% compared to the equivalent period the prior year. However, within that figure, adjusted revenue from new product categories rose 27%.
It seems that revenue from the firm’s new-generation products is growing fast. We are talking about things such as Vapour and Modern Oral products. But even though the rate of growth is perky, there’s still a long way to go because revenue from the new product group still came in at under 5% of the total. Yet the directors said in the report that growth in revenue from New Categories and Traditional Oral, “more than offset” lower cigarette volume in the period.
The US market is important
Combustible products such as cigarettes remain important to the company. And more than 51% of profits in the period came from the US, making the market across the pond essential. So, when US regulators started making noises last year about plans to ban menthol cigarettes, the share price plunged because that type of product accounts for around a third of sales across the industry.
The potential for such a ban on menthol cigarettes appears to remain, but it’s unclear what effect such a ban may have on BAT’s overall sales. Perhaps customers will simply switch to non-menthol cigarettes or other products if a ban is enforced.
Meanwhile, chief executive Jack Bowles said in the recent report that the firm is on track to achieve around 40% revenue growth per year from new categories of product. I think compounding growth at a high rate like that could lead to sales of new products becoming a significant part of the firm’s turnover within a few years.
British American Tobacco today is not without its uncertainties, but while events play out, I’d be happy to collect that big dividend yield.
