The FTSE 100 has been rising, but I reckon the big-cap index still contains some seriously cheap dividend shares.
Today, I want to look at two companies on my radar — one I already own, and one I’m considering buying.
A well-supported 8% yield
My first pick is FTSE 100 tobacco giant British American Tobacco (LSE: BATS). Shares in this classic sin stock have pulled back from last summer’s highs. They now offer an 8% dividend yield for 2023, based on the latest broker forecasts.
At current levels, my sums suggest that British American shares are pretty much priced for zero growth. That might be sensible, reflecting the serious health risks faced by smokers.
However, the reality is that the tobacco industry has continued to thrive for much longer than expected. Tobacco companies have combined and simplified their operations. They remain large and profitable.
BAT is expected to report an operating profit of around £12bn for 2022, with an operating profit margin of more than 40%. Further increases are expected in 2023 and 2024.
Looking ahead
The firm is using some of this cash to build up its lower-risk vaping business. Non-combustible products are expected to generate £5bn of sales and become profitable by 2025. Management says the firm’s vaping range now has a market share of nearly 40% in the US.
Despite this progress, I do think there are some risks investors need to consider. One concern for me is BAT’s debt.
The group has net borrowings of nearly £40bn. Rising interest rates mean that interest payments are likely to increase steadily over the coming years, as debt is refinanced. And I wonder if debt repayment could limit dividend growth for a few years.
There’s also the risk that smoking rates might fall faster than expected, putting pressure on profits.
Dividends are never guaranteed. But based on what we know today, I think BATS’ 8% yield looks pretty safe for the next few years, at least.
A long-term choice
My second pick is FTSE 100 property group British Land (LSE: BLND). Commercial property is going through a difficult patch at the moment, as investors try to understand the impact of rising interest rates. However, I think British Land is likely to end up near the top of the pile, thanks to its strong finances and focus on high-quality London property.
The firm’s most recent results show rental growth of 5% during the six months to 30 September. This helped to offset lower property prices and higher borrowing costs.
As things stand today, British Land stock trades at a 35% discount to its last-reported book value of 695p. Although the value of British Land’s property portfolio could fall further, I think this discount provides an attractive margin of safety.
Most of the group’s property is modern and well located. Its finances also look healthy to me, after a number of property sales in recent years.
I see it as a long-term buy today. The stock offers a forecast dividend yield of 5% and trades at a useful discount to book value. Over time, I think it’s likely to be a decent buy.
