9% dividend yield! Should I buy this FTSE 100 dividend stock?

Are the dividend yields on offer from this FTSE 100 stock too good to ignore? Here I explain why the UK share is (or isn’t) on my shopping list today.

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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.

FTSE 100 tobacco stocks have long been attractive picks for UK share investors. The addictive nature of their products meant that they could bank on resilient revenue generation year after year, whatever the weather. This, allied with their high levels of cash generation, make them generous and reliable dividend payers.

British American Tobacco (LSE: BATS) illustrated this robustness during Covid-19. While total dividends from UK shares fell 44% year-on-year, according to Link Group, this FTSE 100 stock raised the annual payout again. Dividends here have grown at a compound annual growth rate of 7% during the past 10 years.

Pleasingly, City analysts think British American Tobacco will continue to lift shareholder payments, too. They are anticipating rewards of 218.4p and 229.4p per share in 2021 and 2022 respectively. At its current share price of £25.35 per share this means British American Tobacco’s yield sits at a whopping 8.6% for this year and 9% for 2022. Of course, all forecasts can change based on future developments and are not something to rely on. 

e-cigs to the rescue?

The critical issue when it comes to buying into Big Tobacco is not the outlook for their traditional combustible goods. The growth prospects of their next generation products is what is influencing my decision to buy or to ignore the likes of this FTSE 100 firm.

British American Tobacco has itself said that “we encourage those who would otherwise continue to smoke to switch completely to scientifically-substantiated, reduced-risk alternatives.” The company, like all the major industry players, has ploughed eye-watering sums into developing alternatives like its Vuse electronic cigarette. British American Tobacco aims to have 50m buyers of its so-called New Category products by 2030.

The introduction of e-cigarettes on the NHS came one step closer last month in a possible boost to the mass adoption of such products. However, I have huge concerns that vapour-based products may not take off as many are predicting as health worries linger.

Okay, US regulators approved British American Tobacco’s Vuse Solo product in a landmark ruling. But a raft of the company’s other next-gen products failed to attain sign-off. Fears over the impact on users’ wellbeing remain significant as scientists and lawmakers the world over pore over medical data. The prospect of biting restrictions on the sale, marketing, and usage of e-cigarettes and similar products — the same kind of rules that have decimated cigarette usage in recent decades — is a massive threat.

Why I’d buy other FTSE 100 shares

It could be argued that these risks to British American Tobacco are baked into its current share price above £25. Its forward price-to-earnings (P/E) ratio is currently below the widely-considered bargain territory of 10 times and below. It sits at just 7.8 times.

However, I’m not encouraged to invest by this low valuation. It’s worth remembering that the British American Tobacco share price has plummeted more than 40% during the past five years. This is why, as someone who invests with a long-term view, the prospects of more market-bashing dividends over the next couple of years aren’t enough to make me part with my cash. Id rather buy other big-dividend-paying stocks right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Royston Wild 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.

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