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I’d buy this high-quality FTSE 100 stock paying a big dividend

I’ve skimmed through the full-year results report released on 27 February by high-quality FTSE 100 stock British American Tobacco (LSE: BATS) but can find no mention of coronavirus.

My assumption is that the pandemic may have a negligible direct effect on trading for the company. Overall, products for smokers tend to experience rock-solid demand in the sector, and people rarely forego their smokes or equivalents, even in the leanest of economic times.

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Impressive trading and financial record

That’s why BATS’ record of growth in revenue, earnings cash flow and shareholder dividends is generally steady.

However, there are risks, and the report’s ‘Risks and Uncertainties’ section fleshes them out. Things such as competition from illicit trade; disruption because of legislation; the firm’s potential inability to deliver on its New Categories strategy; market-size reduction; litigation; geopolitical tensions; disputed taxes, interest and penalties; changes in the tax regime; foreign exchange rate exposure and other things.

It’s a long list, and underline’s that there’s no such thing as a risk-free share. Even great big, cash-generating, defensive FTSE 100 shares like this one can plunge a long way when things go wrong. Although just recently, you hardly need me to remind you of that!

A positive outlook

Meanwhile, the outlook statement for 2020 reveals the company anticipates global industry cigarette and tobacco heating products (THP) volumes will fall by around 4%. Within that figure, the directors assume that US industry volume will fall by about 5%. Indeed, the backdrop has been one of declining volumes in the sector for years, yet BATS has powered ahead, using its cash flow to fuel returns for shareholders.

The firm expects currency-adjusted revenue to grow between 3% and 5% during 2020. And that’s the type of outcome we’ve become used to from BATS. On top of that, the directors expect “continued operating margin improvement.” And there will be an ongoing drive to grow the New Categories division, which should produce £5bn in revenue by 2023 or 2024 if the company meets its targets.

The pandemic scare affecting the stock

Overall, the directors said in the report the business is “performing well” and we can expect another year of “high single figure constant currency adjusted EPS growth,” and strong operating cash flow conversion “in excess of” 90%. But there’ll likely be a 4% headwind on full-year adjusted earnings per share growth because of foreign exchange movements. Maybe. We’ll see. Most markets have been all over the place lately!

Meanwhile, at the recent share price near 2,540p (and falling as I write), the stock is almost 30% down from its position in early February. At this level, the forward-looking dividend yield for 2021 is just above 9%.

BATS is near the top of my watch list. But I never buy any share when it is obviously still falling, no matter how attractive the value indicators, or how enthusiastic I am about the firm’s prospects. One possibility of which I’m mindful is that the tobacco sector could be dumped by investors altogether, rather like the oil sector appears to have been. For me, it’s ‘wait and see’ for the time being.

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Kevin Godbold has no position in any share mentioned. 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.