British American Tobacco (LSE: BATS) has been a leading dividend stock in the FTSE 100 for many years. In 2022, its shares had a dividend yield of 6.6%, in 2021 this was 7.9%, and in 2020 it was 7.8%. This year, the payout was initially estimated to settle somewhere above 8%.
However, the total rewards to those holding its shares may well be considerably higher than that. According to several reports, major shareholders are pressuring its new CEO Tadeu Marroco to restart share buybacks.
These would be aimed at speeding up the return of capital to its shareholders and boosting its share price. That is needed as so far this year, the shares are down around 20%.
How solid are the dividends?
The key for me in considering the likelihood of dividends being maintained at high levels is the coverage ratio. This indicates how many times a company could pay the figure offered. Broadly speaking, a ratio of two and above is considered good. One of 1.5 or below is considered a possible cause for concern.
British American Tobacco’s ratio in 2022 was 1.71, but in the previous two years it was only a little above 1.5. In 2018, it even dipped just below the 1.5 threshold, although it recovered to 1.54 in the following year.
For me, these figures are supportive of the high dividends the company has paid out over the previous five years.
How solid is the core business?
The company is popularly referred to as BAT, and its tagline ‘A Better Tomorrow’ (plus a video on its website that might lead the casual viewer into thinking the company is in aerospace) focuses on its non-combustible products future, rather than its cigarettes-based past.
But the central problem for the firm is that, regardless of image changes, its core business is tobacco and nicotine. This means that it must deal with multiple government-led campaigns aimed at eradicating these products in many countries. It also means the shares are often shunned by funds run along environmental, social, and corporate governance principles.
As mentioned, the company is focusing on “reduced risk” products. The thrust of these efforts are on non-combustible (vaping) products. Its ambition is to have 50m consumers of such products by 2030.
Over the same period, it aims to grow these revenues quicker than its total revenues. The goal is to reach £5bn of non-combustible product revenues in 2025.
So far, it has done well. Consumers of its non-combustible brands rose by 4.2 million in 2022, reaching 22.5 million. Revenue from these products accounted for 14.8% of its total at the end of 2022.
For me, there are two key risks in the share price. One is lawsuits brought against the company for the damage to health created by its products. The other is government measures to further clamp down on nicotine products.
However, the increased likelihood of buybacks being restarted looks positive to me for the share price. As do the high levels of dividends and the business growth plans. For me, these combined could recoup the current share price losses and turn into significant gains.
I have other holdings that offer good dividend yields and growth prospects. But if I did not, I would buy these shares now for the likely high dividend yields and growth prospects.
