I’m looking to boost my passive income through dividend-paying stocks. One option I’m taking a look at is British American Tobacco (LSE: BATS). Could this hig- yielding stock be a good addition to my holdings?
Share price drop
British American Tobacco is a multinational business that manufactures and sells cigarettes, tobacco, and other nicotine products. Established in 1902, it is one of the largest tobacco businesses in the world.
The British American share price has been on a downward trajectory for some time now. In fact, it is currently at 52-week lows. As I write, the shares are trading for 2,572p. At this point last year, they were trading for 3,383p, which equates to a 23% drop.
I believe the British share price has fallen for a few reasons. To start with, performance in the US market has dwindled recently. This has not been helped by the threat of changing regulation in the US regarding vapes and e-cigarettes. Furthermore, some recent changes in senior management may have spooked investors.
I’m not concerned by the share price drop. In fact, I consider it an opportunity to buy cheaper shares in a quality established business with lots of passive income opportunities ahead.
Passive income opportunity or one to avoid?
So let’s take a look at some of the bull and bear aspects of buying British American shares. Firstly, the shares look undervalued at current levels on a price-to-earnings ratio of just 8. I regard any stock under a ratio of 10 to be undervalued.
Next, at present, the British American dividend yield stands at 8.7%. This is over twice the FTSE 100 average of 3%-4%. Furthermore, I can see the company has grown its dividend for the past six years in a row. It is worth mentioning that dividends are never guaranteed and can be cancelled at any time by the business.
Finally, British American is investing heavily into tobacco alternatives, which is pleasing to see. Since the pandemic, the awareness surrounding the detrimental impact of smoking has only increased, as studies reveal its potential to worsen respiratory systems. Initiatives and products offering consumers alternatives could boost performance and returns and offset any drop in traditional tobacco product sales.
From a bearish perspective, British American is at the mercy of changing regulations. As I touched upon earlier, the share price has been affected by rumoured issues in the US market around changing regulation. These regulations could halt sales of certain products, which could affect the bottom line.
Finally, Action on Smoking Health reports that smoking levels are falling and have been for some time. This is bad news for businesses like British American Tobacco and others. A decline in its bread-and-butter products could hamper performance and any passive income shareholders are looking to make.
My verdict
To summarize, I believe British American Tobacco is a good stock to buy to boost my passive income. I would be willing to add some cheap shares currently, if I had the spare cash to do so.
British American’s dominant market position, dividend yield and payout record, performance history, and growth initiatives helped me make my decision.
