It’s always worth keeping a close eye on the ex-dividend dates for FTSE 100 shares. That’s because investors need to buy a stock before the ex-dividend date to receive the next payout.
For those seeking passive income, 26 June is a big date. That’s the day British American Tobacco (LSE:BATS) shares go ex-dividend. The company has long been one of the most reliable FTSE 100 dividend stocks, and today’s 6.9% yield is a tantalising proposition.
Here’s why investors should consider buying the stock today.
Dividend superstar
British American Tobacco shares have an obvious dividend appeal. The headline yield figure’s undeniably impressive. Only five other FTSE 100 shares beat it. The tobacco giant’s next quarterly dividend will be 60.06p per share.
Beyond the yield, there’s plenty to like about the company’s track record, too. Reaching seven consecutive years of dividend increases is an admirable milestone for the firm, considering a huge number of UK shares cut or suspended distributions during the pandemic.
Looking ahead, the target is to pay dividends of 65% of long-term sustainable earnings. This looks sufficiently conservative to me to give confidence in the company’s future payout potential, albeit dividends are never guaranteed.
A stock going up in smoke?
Admittedly, British American Tobacco shares have their fair share of health warnings. Global smoking rates have been falling for decades, and stricter government regulations on the sector are putting pressure on profitability. Fears that cigarette manufacturing’s a sunset industry are well-founded. There are significant challenges for the company to overcome.
The business has some credible answers to these problems. It aims to generate more than 50% of its revenues from smokeless products by 2035. The group’s offering has come a long way. Heated tobacco, vapour products, and oral nicotine pouches are making an increasingly important contribution to the bottom line, thanks to 29.1m consumers. They currently account for 17.5% of the firm’s sales.
I think it’s also too early to call time on cigarettes just yet. British American Tobacco’s operating margins are still over 40%, and the company offset a 5.2% volume decline in its combustibles range during FY24 with price hikes.
Cigarettes are notoriously addictive products and have fairly inelastic demand to price changes. This means that smokers’ consumption does not substantially change in response to price movements, equipping the business with strong pricing power. That’s a huge asset as the group transitions to a more smokeless future.
I’m holding my shares
I don’t dismiss the long-term risks facing British American Tobacco shares lightly. I wouldn’t want my portfolio to be overexposed to tobacco companies. In my view, diversification is always worth it to appropriately manage risk when investing in the stock market.
That said, I’m a shareholder in the company and remain optimistic that it can continue to innovate in developing and marketing its alternative range of nicotine products. It’s ahead of much of the competition in this arena.
And then there’s the bumper dividend. This is the main reason I hold the stock, and I always reinvest the cash payouts in other shares in my ISA. For investors who don’t own this mighty FTSE 100 income generator, it’s worth thinking about buying it before the ex-dividend date later this month.
