10.8% yield! I’d buy British American Tobacco shares and hold for 30 years

British American Tobacco shares offer one of the biggest yields on the FTSE 100. But are they worth buying as we approach a smoke-free future?

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Are British American Tobacco (LSE: BATS) shares the best buy for a ‘smokeless world’? 

The shares leapt 6.5% after earnings last week following higher-than-expected figures in New Categories (NC) products like vapes and e-cigarettes. 

If tobacco is on its last legs, is the FTSE 100 stock worth buying for the ‘smoke-free’ revolution? Here’s what I think.

First and foremost, this is a stock to buy for the dividend. Huge revenues and cash flows boost a dividend that’s been increasing for decades. The analyst consensus predicts the yield to rise as high as 10.8% in the coming years.

So the question is can these new products replace the massive revenues from global sales of cigarettes?

Well, management is keen to highlight the transition. The first slide of last week’s full-year presentation declared in large, unmissable letters, “​​Building a Smokeless World”.

In fairness, the firm’s range of NC products is extensive. Its leading brand is Vuse, a tobacco-free ‘nicotine alternative’ product that most people would call a vape. Vuse drives around half of NC revenue.

Vuse itself is growing market share and enjoyed 36.1% of the global ‘vapour’ market share in 2023. 

Other product lines include ‘heated tobacco’ – using an aerosol at low temperatures for fewer toxins and ash – and ‘modern oral products’ like Velo, which is similar to Swedish-style snus. 

Chief Executive Tadeu Marocco said: “I’m particularly pleased with our performance in new categories.”

He has a point. Sales of NC products were around the £3bn mark this year and turned profitable too – two years ahead of schedule. 

Hot air?

Future targets include £5bn of sales in 2025 and 50% of all revenue from NCs by 2035. 

As for tobacco, the company has mentioned a “finite lifetime of 30 years” for its cigarette brands, hinting at a 2054 deadline for the “smokeless world”

While three decades seems like a long time, there’s also a long way to go. Despite rising sales, the £3bn of NC revenue is dwarfed by the £22.4bn from cigarettes. 

And on profitability, NC products contributed just £17m of the group’s £12,465m profit from operations. The problem these new products will have is competing with the outrageous margins on cigarettes. 

My viewpoint is that NC earnings will continue rising without coming close to cigarette numbers. At the same time, I think the rumoured demise of tobacco consumption is perhaps exaggerated. 

My move

The level of smoking globally is shrinking but not that quickly. Government intervention curtailing the freedom of people to do so is tough to enact. New Zealand has already scrapped its ‘generational ban’ on cigarettes.  

For these reasons, I think a double-digit dividend well covered by cash flows looks very attractive. The prospect of a bright future for NCs is the icing on the cake. I may top up my position soon.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Fieldsend has positions in British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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