Is British American Tobacco plc A Super Income Stock?

Does British American Tobacco plc (LON: BATS) have the right credentials to be classed as a very attractive income play?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

british american tobacco / imperial tobacco

Throughout the credit crunch, British American Tobacco (LSE: BATS) (NYSE: BTI.US) has been an incredibly reliable income stock. As well as its share price doubling over the last five years (from £16.50 to its current price of around £33), it has increased dividends per share at an annualised rate of 9.4% over the last four years.

However, with a combination of sluggish earnings growth and a higher share price, is British American Tobacco still a super income stock?

With a yield of 4.3%, British American Tobacco continues to offer a generous income. It compares favourably to the FTSE 100 (which has a yield of around 3.5%) as well as being considerably higher than a typical high-street savings account and inflation.

Where British American Tobacco really comes into its own, though, is in regard to the consistency of its dividend. Unlike many companies listed on the FTSE 100, whose profits are largely dependent upon the level of economic growth, British American Tobacco is an ‘all-weather’ dividend payer. In other words, even during a recession it is likely to not only maintain its dividend per share payments, but increase them — just as it has done during the credit crunch. This should provide investors not only with a relatively high source of income but also a reliable one.

In addition, British American Tobacco is forecast to increase dividends per share at a brisk pace over the next two years. A rate of growth of just under 5% is forecast by the market and, although profits are set to flatline in 2014, the company has the financial strength to continue to increase payments when this is the case.

The attraction of British American Tobacco as an income play should not give the impression that management is being overly generous with regard to the proportion of profits paid out as a dividend. In 2013, 65% of profit was paid out in dividends and, since British American Tobacco is a mature company operating in a mature sector (and is therefore relatively stable) it could afford to increase the payout ratio. Doing so would make it an even more attractive income play.

So, with a yield of 4.3%, reliable dividend per share growth and the scope to pay out a greater proportion of profit as a dividend, British American Tobacco should still be classed as a super income stock.

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.

Peter does not own shares in British American Tobacco.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »