1 dividend stock down 21% to consider buying right now

This dividend stock has suffered recently. But this Fool thinks now could be a buying opportunity. Here he explains why.

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Global markets have been under the cosh recently and as such, many share prices have been squeezed. One positive for dividend stocks is that it translates to higher yields.

I’ve had my eye on a few. But one that stands out is British American Tobacco (LSE: BATS).

I’m already a shareholder. With the dividends I’ve received, as I do with all my payments, I’ve reinvested it back into buying more shares. I’m wondering if now is the time for me to consider increasing my position.

I say this because in the last 12 months, the stock is down 21.2%. It’s fared slightly better in 2024, gaining 1.9%. But I still think it looks cheap.

Dividend royalty

As I write, I can pick up shares of the tobacco behemoth trading on around six times earnings. When I put that alongside its 9.8% yield, its shares look like a steal, in my opinion.

The issue with dividends, however, is that they are never, ever guaranteed. We saw this in action during the pandemic. Increased pressure on businesses saw them halt their rewards to shareholders. Similar events occurred during the global financial crash of 2008.

But is there a way to mitigate this? Well, not totally. Yet there are steps I can take. For example, I can target Dividend Aristocrats. Luckily for me, British American Tobacco is one.

These are companies that have increased their dividend payments for a long time. For British American Tobacco, that’s 25 years. That track record provides me with confidence the firm will keep paying out.

No smoke without fire

The stock’s performance has been far from exceptional. There’s a reason for that. British American Tobacco operates in an industry that’s becoming continuously more scrutinised. Governments are pushing for society to become ‘smoke-free’.

This is having a direct impact on the business. Back in December, its share price plummeted 8.4% in a day after it announced that it took a £27.6bn impairment charge on some of its US cigarette brands.

Shifting away

But not to fear. The business is aware of the seismic shift that we’ll see around smoking in the times to come. As such, it’s diversifying. And it’s doing a smashing job at it.

New Categories, its non-combustible goods division, turned a profit last year for the first time. It raked in £17m two years ahead of the group’s original target. This division is home to brands such as Vuse and Velo, which continue to grow in popularity. It aims to have 50m consumers using these products by 2030.

A rare chance?

With its share price flagging, I see now as a smart time to swoop in and snap up the stock.

Smoking is becoming less popular. But it’ll be decades before it’s extinct. Until then, British American Tobacco remains one of the dominant forces in the industry with a host of premium brands under its umbrella. The growth seen in its New Categories business is also extremely encouraging.

For a company of its quality, I think its shares look too cheap. Its meaty yield is the cherry on top of the cake. If I had the cash, I’d buy more shares.

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.

Charlie Keough 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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