I’d buy British American shares to earn its 8% dividend yield in a Stocks and Shares ISA today

The British American Tobacco share price comes with one of the best dividends on the FTSE 100. Check it out if you’re investing for income.

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British American Tobacco (LSE: BAT) shares may have fallen by a third over two years, but this remains one of the best dividend stocks on the FTSE 100.

The British American Tobacco share price rallied after the Covid crash in March, but has since resumed its downwards trajectory. It’s flat after today’s solid half-year report, which showed a 3.3% increase in profit from operations to £5.37bn. This was better than analysts expected. Revenues grew 1.1% to £12.27bn.

Developed markets still deliver 75% of the company’s revenues, and were resilient during the pandemic. Management put this down to “stronger consumption trends, less negative impact of vaping on cigarettes, higher supply chain inventories and an extra selling day.”

However, cigarette volumes continue to fall, down 6.5% in the first six months of 2020, to 310.5bn. British American Tobacco hopes vaping can fill the gap, and revenues jumped 40.8% to £265m. Non-combustibles now deliver 10% of the group’s total revenues.

Meanwhile, the airline industry isn’t the only one hit by travel bans, grounding passengers also hit duty-free sales of cigarettes. 

British American Tobacco shares hold firm

Management still reckons revenues will grow between 1% and 3% this year, after previously lowering its target in June. It didn’t make any further changes to earnings guidance today, pleasing investors. This was a solid set of results, given current concerns. 

British American Tobacco shares are now trading at a bargain price, just 8.1 times forward earnings. Those earnings may have taken a slight knock during the pandemic, but nothing on the scale suffered by many FTSE 100 companies.

Smoking is still in long-term decline. That could accelerate if we all decide to get healthier in the wake of the coronavirus. More than one million Britons have given up during the pandemic, according to charity Action on Smoking and Health. It will be interesting to see if that’s replicated elsewhere.

This is a top FTSE 100 dividend stock

British American Tobacco is fighting back by further boosting market share, which rose 50 basis points by volume, and 20bps by share. It boasts major brands including Kent, Dunhill, Lucky Strike, Pall Mall, Rothmans, Newport, and Camel.

The £60bn FTSE 100 group still shifts a huge amount of units, and remains a highly cash-generative business. It’s able to run debts of around £44bn without spooking markets. Management calculates that adjusted net debt to adjusted EBITDA will be around 3x by the end of 2021. I’d like to see that come down, but it looks manageable.

The real buzz here comes from the dividend. Management is committed to its 65% dividend payout ratio, which gives you a forecast yield of 8.1%. In today’s troubled dividend market, that’s stunning.

British American Tobacco shares may not be going anywhere right now, but its dividends will take you a long way.

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.

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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