British American Tobacco (LSE: BATS) is one of the only FTSE 100 shares that can be called a ‘dividend yield hero’.
I focus on these types of companies quite a lot. That’s because I want strong compounders for my Self-Invested Personal Pension (SIPP). Since it offers a 9%+ dividend yield, this stock seems to fit the bill.
One of the major things that British American Tobacco has going for it is a consistent dividend record.
The company has managed to grow its payments to income investors for the last 23 years in a row. That makes it one of only a handful of FTSE 100 stocks with this impressive record.
9% dividend yield for life?
The British American Tobacco share price has been hammered over the last year and a half, with markets repricing the stock down from $45 to just above $30. But as a consumer defensive business, British American Tobacco could attract more attention as the UK heads closer to a recession. Investors tend to shift out of riskier plays and into consumer defensives in uncertain economic times.
But readers will be here to focus on the 9.2% dividend yield, so let’s cover that in detail now.
In 2017, the company paid £1 per share in dividends. By 2019, that had more than doubled to £2.03 per share. This year, it expects to pay investors a total of £2.39 per share.
The company also recently restated its long-term strategy to pay investors 65% of profits as dividends.
Because so few UK stocks increase their dividend payments over more than two decades, it makes British American Tobacco quite an interesting stock to track.
FTSE 100 downsides?
We do need to mention the potential downsides to investing in 9%-yielding shares like British American Tobacco.
One thing that weighs on my mind is the pretty massive amount of net debt the company carries. At last count, in 2023, that stood at £38bn. Yes, it is lower than the £45bn pile in 2017, so debt has been coming down.
But with interest rates at historic highs, that means the interest payments on debt will be larger. Higher interest payments for large debt piles suck cash out of a business and can be a drag on profits.
There are also ethical considerations to be aware of for this stock. Personally, as a former smoker, I honestly wish I’d never started.
Rising concerns about young people getting hooked on vaping may add to jitters about whether to invest here, too. The company says it aims to sell £5bn-worth of these products by 2025.
Future promise
Let’s switch back to the company’s financial prowess for a moment.
The company forecasts that it will be able to generate £40bn of free cash flow over the next five years. To me, that looks like very good news for the dividend and the payout ratio.
It can be tricky when it comes to buying shares in a company that sells controversial products. Every investor will have to make their own judgement call. But that 9% dividend yield and 23-year history of upping payouts may be too juicy to ignore.
