In some ways, it is unsurprising that British American Tobacco’s (LSE: BATS) share price has dropped 23% this year. After all, as evidenced in the name, it has a history of making products that have fallen out of favour.
However, changes to the management board made on 19 June will presumably seek to stress the positives. And, perhaps surprisingly to many, there are several of these.
A longtime FTSE 100 dividend star
For me, a key positive is that it has long been a leading dividend stock in the FTSE 100. 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, according to several reports, major shareholders are pressuring its new CEO Tadeu Marroco to restart share buybacks. This would increase the total return to all shareholders even more and may begin to repair the ailing share price.
There is scope to do this, it seems to me, given the solid coverage ratio at the company. This indicates how many times an announced dividend could be paid out. Basically, a ratio of two and above is considered good, while one of 1.5 or below is a possible concern.
British American Tobacco’s ratio in 2022 was 1.71, but in recent years it has hovered around 1.5.
For me, that recent uplift is supportive of the high dividends the company has paid out over the previous five years.
Changing the business message
British American Tobacco cannot erase a legacy of making products that are bad for their users’ health. What it can do is shift the message to investors that it is making different, less harmful, products.
And this it is doing, stressing its focus on non-combustible (vaping) products. Its ambition is to have 50m consumers of such products by 2030. 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.
New management backing the CEO’s vision
It seems to me that CEO Marroco’s changes to the management board are aimed at stressing this change.
Indeed, he said as much when the changes were announced: “They… have the depth of experience to enable the continued strategic and cultural transformation of BAT.”
The new appointees also have extensive experience in many emerging markets the company is targeting for growth.
For me, one risk in the share price is lawsuits brought against the company for the damage to health created by its products. Another 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. And so do the high levels of dividends and the business growth plans.
I have other holdings that offer good dividend yields and growth prospects. But if I did not, I would buy these shares now in anticipation of substantial price gains and excellent dividends.
