One share I own has had a dreadful 2023, losing 32% of its value. It is also lower than it was five years ago, by 10%. Its current customer market is set to shrink, and the company recently wrote down the value of its assets by many billions of pounds.
Yet this share – yes, this share that has had such a terrible 2023 – is my top passive income idea for 2024. That is why I have recently been buying more for my portfolio.
Separating the signal and the noise
When a share plummets in price, it can offer a short-term bargain buying opportunity.
But it can also be a sign that a business is in real trouble – and the price can keep falling.
What is the case with the share I have been buying, British American Tobacco (LSE: BATS)?
The share price fall is actually partly explained by that massive writedown. The City was unnerved when British American said that it now expects the long-term value of some of its iconic cigarette brands to be zero.
On the other hand, I do not think that was a surprising move. Cigarette demand has been steadily falling for decades already.
Despite that, though, it remains huge. British American alone sold over 600bn cigarettes last year. Its brands could help it grow its business in rapidly expanding markets for non-cigarette tobacco products. The writedown was huge but did not affect the company’s cash position: it was an accounting adjustment.
Dividend income machine
That brings me to the main appeal to me of owning British American Tobacco shares.
Having raised its dividend annually for decades, the cigarette manufacturer is a passive income machine. After the recent weak share price performance, its yield has been pushed up to 10%.
For a FTSE 100 firm with a long history of annual dividend increases, that sort of yield is rare. Diageo has raised its dividend annually for decades, but yields under 3%. So too has Spirax-Sarco, but it yields less than 2%.
Can things keep going?
But can the monster payout last?
My answer is yes it can (although that does not mean it necessarily will). That is why I have been buying more of the shares.
I recognise the risks.
Declining cigarette sales could hurt both revenues and profits. The company faces a seemingly never-ending wave of regulation and litigation risks.
However, it remains a free cash flow machine. Making cigarettes is cheap and the company’s premium branding allows it to charge a price that allows for a good profit margin. Last year, the firm made a post-tax profit of £6.8bn.
While dividends are never guaranteed, management has signalled that it plans to keep raising the dividend annually.
Whether that happens remains to be seen. But even the current yield makes this a very attractive passive income idea for me as I look forward to 2024 and beyond.
