Investors who bought British American Tobacco (LSE:BATS) shares five years ago have had a very nice second income. The firm has returned over 30% of its share price in cash since 2021.
On top of this, the share price is up almost 75%. So in an uncertain and volatile market, is this a stock for investors looking for safety and durability to consider buying?
Dividend growth
British American Tobacco has an incredibly impressive growth record. The firm has increased its dividend each year for over a quarter of a century and it isn’t showing signs of stopping.
With the company set to distribute just over £2.45 in dividends per share in 2026, investors need 4,898 shares to earn £12,000 a year – or £1,000 a month in passive income. At today’s prices, that’s an investment worth £222,690.
But while few are in a position to make that kind of a move in one go, that dividend growth means the number has fallen. Five years ago, the number would have been 5,565. And as long as the firm manages to keep the dividend increases coming, the number will keep coming down in future.
Can it continue?
A 5.38% dividend yield is well above the FTSE 100 average. But – as Tom Jones might say – it’s not unusual in the context of British Tobacco shares over the last five years.
In fact, 5.38% is the lowest the dividend yield has been since 2021. And that makes it seem like a bad time to consider buying the stock, but investors need to be wary of that thought.
There’s no way to go back in time and buy the stock in 2023 when it was trading with a yield above 10%. But the fact that it was cheaper back then doesn’t mean it isn’t good value now.
Fixating on previous prices can lead investors to misjudge the opportunities in front of them. It’s easy to do, but this is something the best investors work hard to avoid.
Where are we now?
In many ways, British American Tobacco hasn’t changed much over the last five years. Its core product is addictive and harmful, but it’s cheap to produce and extremely profitable.
That means there’s a constant threat of regulation for investors to consider. And the company’s main defence against this is the launch of its new products, which include nicotine pouches. Those have proved popular, but the question is whether they can grow quickly enough to offset declines in cigarette volumes. I think though, that the demographic trends make this unlikely.
Cigarette revenues have been stable, but this has been due to price increases. And that can’t go on forever, especially with an older customer base leading to non-linear volume declines.
Income opportunities
When I try to list companies least likely to be disrupted by artificial intelligence (AI), British American Tobacco’s pretty near the top. And that’s why the stock’s doing well.
Ultimately though, I don’t see that as enough to justify a long-term investment. Even for investors looking for a reliable second income, I think there are far better stocks to consider.
