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The market has soared since the beginning of 2023 S&P500 The index has achieved a total return of 48% in that period, which has increased the index’s price-to-earnings ratio (P/W) ratio of almost 29.
This is much higher than the long-term market average, with many popular stocks such as Apple, NvidiaAnd Microsoft trading at even higher multiples. High earnings ratios likely entail high risks for strong future returns. You have to be optimistic to believe that returns over the next ten years will resemble the last ten years for the S&P 500.
What should investors do when so many stocks look expensive? I have one dividend stock that looks extremely attractive compared to the market: British-American tobacco (NYSE:BTI). The company has a dividend yield of almost 10% and a dirt-cheap earnings ratio. Unlike most stocks, the market is currently extremely pessimistic about the company’s prospects.
Here’s why you should buy British American Tobacco shares before the second half of 2024.
Declining unit volumes, consistent price increases
Investors are disappointed in tobacco companies due to accelerated volume declines for traditional cigarettes. British American Tobacco saw an 8% decline in cigarette sales volume around the world in 2023.
While these types of numbers are concerning, investors should remember that tobacco companies are dealing with the fallout from conflicts around the world, making the volume numbers even worse. On an organic basis, British American Tobacco experienced a global volume decline of 5.3%.
The company can counter volume declines with consistent cigarette price increases. This is why combustible sales fell only 4% in 2023, and a paltry 0.8% if currency fluctuations are not taken into account, which the company has no control over.
Looking at the whole picture, it is clear that British American Tobacco’s cigarette division is doing well, despite heavy volume declines. While not a hyper-growth company, price increases over the past five years have led to stable consolidated revenues.
And this isn’t the company’s only product segment.
Grow in pouches and vapes
Beyond cigarettes, British American Tobacco has invested in new and less harmful nicotine products. The most important are the Velo nicotine pouch brand and the Vuse electronic vape brand.
Organic sales for vaping products grew 27%, and oral nicotine pouches grew 39% in 2023. Overall, these new categories are approaching $5 billion in annual sales and achieved segment-level profitability last year.
In the coming years, this segment will finally start contributing to the company’s overall profit pools and free cash flow. It’s still much smaller than the company’s cigarette division, which has more than $20 billion in annual global sales, but vapes and pouches are new categories that could help replace legacy cash flows and build a sustainable British American Tobacco in the long term. to build.
A sustainable dividend yield of 10%
Currently, British American Tobacco has a dividend that yields 9.2% on a forward-looking basis. This is much higher than the S&P 500’s figure, which is under 2%, and more generous than a high-yield savings account, which currently pays just under 5%.
A high dividend yield indicates that investors are pessimistic about the company’s future earnings, and the stock currently has a dirt-cheap price-to-earnings ratio of 6.2.
However, I think this is misplaced, and investors can now benefit from this pessimism. British American Tobacco’s annual dividend per share is $2.90 (in dollars). This is funded by free cash flow per share of over $5. Even if the company’s cash flows aren’t growing, the dividend is not only sustainable, but appears poised to grow.
And with the rise in profits from nicotine pouches and vaping, I think it’s likely that British American Tobacco’s free cash flow per share higher 5 and 10 years from now. For these reasons, the stock looks like a great buy in mid-2024 and an easy one to hold over the long term.
Should You Invest $1,000 in British American Tobacco Now?
Before you buy shares in British American Tobacco, consider the following:
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Apple, Microsoft and Nvidia. The Motley Fool recommends British American Tobacco Plc and recommends the following options: long January 2026 $395 calls on Microsoft, long January 2026 $40 calls on British American Tobacco, short January 2026 $40 calls on British American Tobacco, and January 2026 short calls of $405 on Microsoft. The Motley Fool has one disclosure policy.
1 Spectacular Dividend Stocks Yielding Nearly 10% to Buy for the Second Half of 2024 was originally published by The Motley Fool