When it comes to finding high-yield shares to buy, one corner of the stock market has popped up consistently over the past few years: tobacco.
With declining cigarette demand in many markets and an ever-present threat of new regulatory and legal problems eating into profit, as well as pariah status for some investors, tobacco shares have long been unloved by some.
From a yield perspective though, they have ongoing appeal.
British American Tobacco (LSE: BATS) and Imperial Brands, both constituents of the FTSE 100 index of leading shares, yield 8.4% and 6.9%, respectively.
But here is the thing that intrigues me. Since the start of this year, those two shares have risen by 20% and 18%, respectively. Both are now within 3% of where they were five years ago.
It is a similar story across the pond. Altria, with a 7.7% yield, is up 27% so far this year. Meanwhile, although its 4.3% annual payout does not qualify it among the ranks of high-yield shares in my book, Philip Morris International is 28% higher now than it was at the start of January.
What’s going on with tobacco shares?
I recently sold my Altria shares but remain invested in British American Tobacco.
Although each of the companies above has its own strengths and weaknesses, the broad picture is consistent. Their share prices have been rising significantly in 2024.
Partly I think that reflects a swing back to more defensive stocks by some investors, potentially indicating concerns they have about the sustainability of growth stock valuations elsewhere in the market.
But I think it could also reflect investors reassessing whether tobacco valuations had been pushed down too far, regardless of where we are in the economic cycle.
Cash keeps flowing
Consider British American as an example. That 8.4% puts it among the most lucrative of high-yield shares in the FTSE. It seems priced for doom, gloom or both and undeniably still comes with risks attached.
But this is a company that has raised its dividend annually since the last century, earning it status as a Dividend Aristocrat. It has a huge, proven business that generates billions of pounds in free cash flows in a typical year, helping to support the dividend.
First half revenues did show a year-on-year decline of 8.2%, which concerns me as a shareholder. But the firm has grown revenues for years as cigarette sales shrink in key markets. It is expanding its non-cigarette business quickly.
The first half saw it cut adjusted net debt by 12.4%, which I see as positive for the balance sheet. With strong brands, a large user base and excellent pricing power, I think British American could continue to generate sizeable free cash flows – and a juicy dividend.
Here’s how I’m responding
It seems like tobacco shares are increasingly back in favour — but how long that may last is anyone’s guess.
I continue to own shares in British American for the high yield.
Between past dividends and a share price gain, Altria served me well as an investment so I decided to take advantage of the price jump to bank some cash.
