The Motley Fool

A dirt-cheap 7.5%-yielding FTSE 100 dividend stock that I’d buy for 2020

Image source: Getty Images

The FTSE 100 is full of dividend bargains right now, but one that really stands out to me as being severely undervalued is British American Tobacco (LSE: BATS)

Ethical considerations aside, over the past few decades, this company has earned itself a reputation as being one of the FTSE 100’s most reliable income stocks.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

British American’s healthy profit margins and robust cash flows have enabled the group to increase its dividend every year for at least the last two decades. And today, the stock supports a dividend yield of 7.1%, which is set to rise to 7.5% for 2020, according to current City projections.

However, despite British American’s healthy dividend credentials, investors have been selling the stock recently due to concerns about long-term growth potential.

Bleak outlook

There’s no denying the use of tobacco is declining around the world, and this suggests the tobacco industry’s time is limited. But British American and its peers have been investing billions in trying to develop the next big thing that could offset the decline in combustible tobacco products. 

The industry had been pinning its hopes on the rise of e-cigarettes but, following a spate of vaping-related deaths in the US, it’s not clear if this will still be the panacea in industry needs. 

According to British American’s second-half trading update, revenue growth in its new categories — e-cigarettes, tobacco heating products and snuff — is going to be at the lower end of management’s expectations for the full-year. The company had been forecasting overall revenue growth of 30-50% for this category in 2019. 

Beating expectations

While this is disappointing news for investors, the rest of the business seems to be firing on all cylinders. The company announced today that while growth in its new categories was below expectations during the first half of its financial year, the legacy business has outperformed expectations. 

Management now believes full-year currency-adjusted revenue growth will be at the top end of its 3-5% long-term target range. The group reckons adjusted earnings per share growth will be in the high-single-digit range.

These figures seem to suggest British American is still in growth mode, even though its new products are not living up to expectations. With this being the case, I think shares in the company look undervalued at current levels.

The stock is currently dealing at a forward P/E of just 9.3, falling to 8.7 for 2020, based on current growth projections. Historically, the shares have changed hands for around 13 to 22 times earnings. On that basis, I think you could make a good argument that the stock is undervalued by approximately 57% at current levels.

The bottom line

If British American continues to outperform expectations, then I don’t think it will be long before this valuation gap closes. And that could happen in 2020 as sentiment towards the business changes.

In the meantime, investors can look forward to that 7.1% dividend yield, which is covered 1.5 times by earnings per share.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Rupert Hargreaves owns shares in British American Tobacco. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.