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The BAT share price dips on solid results. I like its 8% dividend yield

Person smoking cigarette
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British American Tobacco (LSE: BATS) is one of the FTSE 100 index’s biggest players. Its market value of £62.8bn places it in the Footsie’s top 10 by size — a super-heavyweight. BAT is also one of the UK’s biggest dividend payers, with a 2021 forecast payout of close to £5bn. On Wednesday, the BAT share price dipped, despite the tobacco giant releasing solid latest results, partly thanks to new vaping customers. But the world’s largest cigarette manufacturer still generates massive cash flows from smoking.

Share price falls

On Wednesday, the share price closed down 32p (1.2%) at 2,738.5p. But the group presented a solid set of results with several encouraging trends. For example, it boosted its customer base for tobacco-heating products by 2.6m to 16.1m in the first half of 2021. This lifted sales of new products by 40.4% to £883m. However, sales of tobacco and cigarettes are still holding up, especially in populous developing nations.

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Total cigarette sales rose by 1.8% in H1, defying forecasts of zero or negative growth. This boosted first-half revenue to £12.2bn, up 8.1%. Operating profit rose by 5.4% to £5.2bn, but pre-tax profit declined 4.5% to £4.4bn. H1 earnings per share were 142p, down 9p (5.9%) year-on-year. Meanwhile, BAT lifted its first-half dividend by 4.1% to 107.8p from 103.4p. To me, it’s this rising dividend that will provide future support for the BAT share price.

I’d buy BAT today

Of course, it’s a no-no stock for ethical and socially conscious investors. Nevertheless, having been a dividend dynamo for decades, BAT is a core holding among many UK income funds. The 119-year-old firm had total sales of £25.8bn in 2020. These revenues translated into huge earnings, used to fund a flood of dividends to BAT shareholders. But I see this FTSE 100 stock as cheap at the current BAT share price. The shares trade on a price-to-earnings ratio of 10 and also an earnings yield of 10%. The forecast dividend yield of 8% a year is the fifth-highest in the FTSE 100, but is covered only 1.25 times by earnings.

I don’t own the stock today, but I’d be tempted to buy at the current BAT share price. After all, the group has committed to paying out almost 65% of its huge earnings in cash dividends. Also, its forecast net income is expected to leap from £7.48bn in 2021 to £8.04bn next year. Even so, BAT stock stands roughly halfway between its 52-week low of 2,422.5p on 2 November 2020 and its 52-week high of 2,961.5p on 10 December 2020.

To sum up, I see BAT as an unloved stock, unwanted by many modern investors. Yet it generates oodles of capital to be returned as dividends or share buybacks. However, one drawback for  potential investors is that the firm carries a hefty level of net debt. This debt halfway through 2021 was £40.5bn, but this was actually down 7.6% on H1 2020. For me, as an income-seeking value investor, this would be an ideal holding at the current BAT share price. 

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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco. 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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