The Motley Fool

The BAT share price dips on solid results. I like its 8% dividend yield

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Person smoking cigarette
Image source: Getty Images.

British American Tobacco (LSE: BATS) is one of the FTSE 100 index’s biggest players. Its market value of £62.8bn places it in the Footsie’s top 10 by size — a super-heavyweight. BAT is also one of the UK’s biggest dividend payers, with a 2021 forecast payout of close to £5bn. On Wednesday, the BAT share price dipped, despite the tobacco giant releasing solid latest results, partly thanks to new vaping customers. But the world’s largest cigarette manufacturer still generates massive cash flows from smoking.

Share price falls

On Wednesday, the share price closed down 32p (1.2%) at 2,738.5p. But the group presented a solid set of results with several encouraging trends. For example, it boosted its customer base for tobacco-heating products by 2.6m to 16.1m in the first half of 2021. This lifted sales of new products by 40.4% to £883m. However, sales of tobacco and cigarettes are still holding up, especially in populous developing nations.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

Total cigarette sales rose by 1.8% in H1, defying forecasts of zero or negative growth. This boosted first-half revenue to £12.2bn, up 8.1%. Operating profit rose by 5.4% to £5.2bn, but pre-tax profit declined 4.5% to £4.4bn. H1 earnings per share were 142p, down 9p (5.9%) year-on-year. Meanwhile, BAT lifted its first-half dividend by 4.1% to 107.8p from 103.4p. To me, it’s this rising dividend that will provide future support for the BAT share price.

I’d buy BAT today

Of course, it’s a no-no stock for ethical and socially conscious investors. Nevertheless, having been a dividend dynamo for decades, BAT is a core holding among many UK income funds. The 119-year-old firm had total sales of £25.8bn in 2020. These revenues translated into huge earnings, used to fund a flood of dividends to BAT shareholders. But I see this FTSE 100 stock as cheap at the current BAT share price. The shares trade on a price-to-earnings ratio of 10 and also an earnings yield of 10%. The forecast dividend yield of 8% a year is the fifth-highest in the FTSE 100, but is covered only 1.25 times by earnings.

I don’t own the stock today, but I’d be tempted to buy at the current BAT share price. After all, the group has committed to paying out almost 65% of its huge earnings in cash dividends. Also, its forecast net income is expected to leap from £7.48bn in 2021 to £8.04bn next year. Even so, BAT stock stands roughly halfway between its 52-week low of 2,422.5p on 2 November 2020 and its 52-week high of 2,961.5p on 10 December 2020.

To sum up, I see BAT as an unloved stock, unwanted by many modern investors. Yet it generates oodles of capital to be returned as dividends or share buybacks. However, one drawback for  potential investors is that the firm carries a hefty level of net debt. This debt halfway through 2021 was £40.5bn, but this was actually down 7.6% on H1 2020. For me, as an income-seeking value investor, this would be an ideal holding at the current BAT share price. 

Our 5 Top Shares for the New “Green Industrial Revolution"

It was released in November 2020, and make no mistake:

It’s happening.

The UK Government’s 10-point plan for a new “Green Industrial Revolution.”

PriceWaterhouse Coopers believes this trend will cost £400billion…

…That’s just here in Britain over the next 10 years.

Worldwide, the Green Industrial Revolution could be worth TRILLIONS.

It’s why I’m urging all investors to read this special presentation carefully, and learn how you can uncover the 5 companies that we believe are poised to profit from this gargantuan trend ahead!

Access this special "Green Industrial Revolution" presentation now

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.