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Looking for a 7% yield? Then I’d buy the British American Tobacco share price today

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The British American Tobacco (LSE: BATS) share price has been resilient during this year’s stock market crash. It trades just 8% lower than at the start of the year.

Crucially for income seekers, the FTSE 100 cigarette giant is standing by its dividend policy. This involves paying out around 65% of its earnings back to shareholders. Investors get a generous yield of around 7%.

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Given that two thirds of FTSE 100 stocks no longer pay dividends, that makes this income more valuable than ever. British American Tobacco is now the second biggest dividend payer on the index, in cash terms, according to figures from AJ Bell.

Top FTSE 100 dividend stock

It is just one step below oil giant BP. But there’s a difference. BP’s dividend cover is wafer thin at just 0.07 times earnings, while British American Tobacco’s payout is covered 1.53 times. These days that’s pretty impressive.

The British American Tobacco share price dipped 4% following this morning’s first-half trading update. The coronavirus lockdown knocked emerging market sales, notably in Bangladesh, Vietnam and Malaysia. Meanwhile, anti-pandemic measures in South Africa, Mexico and Argentina have persisted longer than anticipated. South Africa has banned tobacco sales, and is yet to indicate when the ban will be lifted.

Next Generation Product (NGP) sales have grown at a slower rate than expected, while the international travel clampdown hit duty free sales. Management said today that the pandemic will knock around 3% off revenues. It’s cutting growth expectations and also the pace of its investments into NGPs as a result.

Nevertheless, management expects earnings to increase 1-3% this year, down from 3-5%. Compared to many, the British American Tobacco share price has held up well. Cash flow conversion is expected to top 90% of adjusted profit from operations this year. The group continues to boost market share in the US and other key regions. 

British American Tobacco share price flatlines

If British American Tobacco makes its full-year dividend, this will continue a run of increases dating back to 1998. This makes it a top source of dividend income today.

Coronavirus is not the only threat, as smoking rates collapse in the West. The trend may accelerate post-pandemic, as investors shy away from firms and products that do harm. We saw what US regulators did to to vaping and e-cigarette sales. Total industry volumes are expected to fall 7% this year. The threat is real and explains why you can buy the stock for less than 10 times earnings.

But the main attraction is its generous dividend. The British American Tobacco share price is trading at 2012 levels. No wonder it has committed to the payout, even though rival Imperial Brands Group has pulled its dividend.

Investors who are happy to invest in tobacco should consider buying British American Tobacco, which has cemented its position as a top FTSE 100 dividend stock today.

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Harvey Jones has no position in any of the shares 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.

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