A few years ago, I thought the game was up for British American Tobacco (LSE: BATS) shares. Smoking was so over. During my lifetime, visitors had gone from merrily puffing away inside my parents’ living room, to standing on the doorstep for a drag, to not smoking at all.
But just look at the FTSE 100 giant today. Its shares have soared 44% in one year, and 86% over two. Despite that tremendous growth, the trailing yield is still a hefty 5.5%, as dividends continue to grow. How come Big Tobacco is in such rude health?
None of my friends now smoke, and from what I gather, my children’s friends aren’t smoking either. Lots of people still do, of course, especially in emerging markets. Someone’s buying the 500bn ‘sticks’ that British American Tobacco sells every year.
FTSE 100 survivor
It’s also fought off decline by taking a bigger share of a dwindling overall market, helped by pricing power and top brands such as Dunhill, Kent, Lucky Strike, Pall Mall and Rothmans. All those vape shops presumably do good business and British American Tobacco is building brands here too, notably Vuse and Velo.
The result? Like it or not, it’s one of the most impressive dividend growth stocks on the blue-chip index. I think its shares are still worth considering today, although I suspect growth may slow after such a strong run. The sector’s still subject to all the healthy and regulatory concerns, which is another risk to think about.
Writing all of that has made me think about Diageo (LSE: DGE). The FTSE 100 spirits maker is having a dismal time. Its shares have plunged 36% in the last year, and 55% over three. While this is largely down to the global cost-of-living crisis hitting demand for its premium brands, and other threats such as tariffs, are we looking at a sea change in attitudes towards drinking too?
Visitors still merrily sip away in my living room. I don’t make them stand on the doorstep yet. They’re less boozy than before, but then we’re getting on a bit. Younger people still like to get plastered, I’ve seen them, but surveys suggest one in four Gen Z-ers don’t touch a drop.
Those who want to stop drinking report that new appetite suppressant loss drugs help. Could drinking go the way of smoking? As we all get more health conscience, there’s certainly a chance. If so, could Diageo then go the way of British American Tobacco? Perhaps.
The idea occurred after I noted that Diageo’s dividend yield has crept up from a lowly 2.1% in 2021 to 4.78% today. That’s creeping closer to British American Tobacco levels. At the same time, the price-to-earnings ratio has dropped from around 24.5, to 13.5. That’s also nearing British American Tobacco levels.
Is big drink turning into big tobacco? If so, it’s not the worst fate in the world, from an investment point of view. British American Tobacco is one of the most rewarding FTSE 100 stocks of the millennium. I think Diageo’s shares are worth considering. Not so much for their recovery potential, but the long-term income, with the odd burst of growth here and there. Very much like British American Tobacco. It’s a theory, anyway.
