While the market has slumped this year, British American Tobacco (LSE: BATS) shares have surged. The FTSE 100 tobacco giant is up by 25% so far this year.
I already own some of the shares, but what really interests me here is the dividend income. Even after this year’s gains, British American shares still offer a high dividend yield of 6.5%. Is this stock still a cheap buy for my portfolio?
A good, cheap dividend stock
British American’s dividend hasn’t been cut for more than 20 years. Since 2002, the stock’s payout has risen by an incredible 555%, from 33p per share to 216p in 2021.
BAT’s dividend has been supported by rising profits too. Post-tax profit has risen from £1.2bn in 2002 to almost £7bn in 2021.
Smoking rates are falling in most developed countries, but British American has been able to beat this trend, thanks to a well-designed strategy.
To boost sales and gain market share, the company has acquired rivals to consolidate the industry and cut costs, focusing on core brands, such as Lucky Strike and Dunhill. Sales have also expanded in emerging markets where smoking rates – and populations – may be rising.
Finally, British American is fast becoming a leader in vaping – the company says its Vuse brand now has a 35% share of the global market. Annual sales of vapes and other non-combustible products are expected to reach £5bn by 2025.
Obvious risks
Before buying shares, I try to consider what could go wrong with an investment. With British American Tobacco, some of the risks are obvious. Smoking is extremely dangerous, and many western governments are working hard to eradicate it.
Regulations could get tighter too. For example, the UK is considering raising the minimum age for buying cigarettes and introducing new taxes on tobacco sales. The ethics of investing in tobacco are difficult and many investors avoid these companies because of the harm caused by their products.
Should I buy more?
Does tobacco have a long-term future? I’m not sure. But I think that BAT’s strategy is likely to deliver reliable results for the foreseeable future.
Its global sales volumes were almost unchanged last year, down by just 0.1% to 637bn cigarettes. Meanwhile, the group’s strong vaping business is putting it in prime position to win over ex-smokers and new nicotine users who choose to avoid tobacco.
This business also remains very profitable. The group’s underlying operating profit margin was just shy of 40% last year and it generated over £7bn of surplus cash.
British American Tobacco shares now trade on around 10 times forecast earnings, with a dividend yield of 6.5%.
This FTSE 100 stock isn’t as cheap as it was at the start of 2022, but I think there’s still some value left in this share. I’d be happy to add to my existing holding at current levels.
