Considering an Investment in British American Tobacco Shares: Potential Lifelong Profits?
As retirees approach their golden years, many investors transition towards a strategy that prioritizes dividends. However, the quest for maximizing passive income may result in a portfolio with higher risks. This predicament arises when considering the acquisition of British American Tobacco (BTI, 0.31%), boasting an enticing 8.4% dividend yield. Here's a rundown of the stock before incorporating it into your dividend-focused portfolio.
British American Tobacco's charm lies in its substantial dividend yield
If the British American Tobacco stock catches your eye, there's a strong chance that the alluring 8.4% yield drew you in. On its own, that figure is remarkably high. However, when contrasted with other yields, it becomes even more striking. For instance, the S&P 500 features a scant 1.2% yield, while the average dividend yield for consumer staples stocks, using the Consumer Staples Select Sector SPDR ETF (NYSEMKT: XLP) as a reference, sits at 2.6%.
From this angle, British American Tobacco seems like a stock that could furnish you with a substantial income source. However, the million-dollar question is: can you truly rely on this income stream long-term?
While the impressive yield alone cannot provide a definitive answer, delving deeper into the company's financial health is essential to evaluate its capacity to consistently pay out such a high dividend through the years. This is where British American Tobacco faces challenges, making its soaring dividend yield a source of concern.
British American Tobacco is a tobacco corporation. Its primary focus lies in the manufacturing and distribution of cigarettes. As health awareness has grown globally and governments have implemented measures to discourage smoking, such as high tax rates and mandatory health warnings on packaging, smoking has became less popular. The significant dividend yield associated with British American Tobacco serves as a warning signal to Wall Street, indicating potential vulnerability in the company's ability to maintain its dividend payments sustainably in the long term.
How severe is the dividend risk at British American Tobacco?
Currently, British American Tobacco is managing to cover its dividend after factoring in one-time charges for 2023. Consequently, there's minimal immediate risk of a dividend cut. Customer loyalty has been instrumental in maintaining consistent sales, allowing the company to implement regular price increases as a countermeasure to declining volumes. Nevertheless, the consistent drop in volumes cannot be overlooked.
In the first half of 2024, the company's combustibles division, mostly comprised of cigarette sales, experienced a 6.9% volume decline. In 2023, this figure rose to 5.5%, while in 2022 it fell at a rate of 5.2%. If other consumer staples companies encountered such a persistent downward trend, they would most likely not be attractive investment options.
In 2023, British American Tobacco adopted a worrisome accounting method regarding its U.S. operations. Although it is a complex shift, essentially the company admitted that its U.S. business may be worthless within 30 years.
This strategy resulted in a substantial one-time charge. However, it's important to note that 30 years is a lengthy period. Although the persistent volume trend is alarming, one must wonder how long this business can continue to support the dividend once even the company itself anticipates its survivability to ultimately amount to zero. At a certain point, regular price increases might only serve to accelerate the decline rather than offset it.
British American Tobacco is not complacent
Ultimately, British American Tobacco is no different from its competitors in the face of challenges affecting its core business. And like its rivals, it is attempting to leverage the revenue it is currently generating from cigarettes to foster growth in new ventures.
In this endeavor, the company has been investing in modern alternatives to cigarettes, such as vaping and pouches. It has demonstrated some success, but the combustibles division still contributes significantly more to the company's total revenue compared to its noncombustible ventures.
What this implies is that British American Tobacco still has a long way to go before it can uncover a suitable replacement for its slowly deteriorating cigarette operations. If your aim is to obtain a lifetime income stream through British American Tobacco, that might not be a promise you can rely on, given the state of its prominent business.
- Despite British American Tobacco's impressive 8.4% dividend yield, its long-term dependency on tobacco products and the global decline in smoking rates raise concerns about its ability to sustainably pay out such high dividends in the future.
- As British American Tobacco strives to diversify its revenue sources by investing in modern alternatives to cigarettes, such as vaping and pouches, the contribution of its combustibles division still significantly outweighs that of its noncombustible ventures, suggesting a need for more substantial growth in these new areas to secure a sustainable lifetime income stream.
