The tobacco industry doesn't have the appeal it once did. It's been decades since the public became aware of the various health risks of smoking, and cigarettes are a fading habit in many parts of the world.
British American Tobacco (BTI -0.51%), or BAT for short, is one of the three prominent public companies in the tobacco space. Like a slowly sinking ship, the stock is down a whopping 38% over the past decade.
So, why list six reasons you should buy it hand over fist? Maybe I like a challenge -- or perhaps the market is missing what the stock can offer. Here are the reasons to scoop up BAT's stock right now.
1. It's a diversified business
British American Tobacco is well diversified across the tobacco space. It sells a mix of traditional cigarettes and newer smokeless alternatives worldwide.
Peers like Altria are concentrated in the United States and thus vulnerable to regulatory threats. Philip Morris International is concentrated outside of America. BAT doesn't overly rely on a single market or product category, making the business more resilient.
2. Speaking of smokeless products...
Smokeless products are increasingly standing out as the tobacco industry's future beyond smoking. The smokeless market breaks down into three major categories: electronic cigarettes, heat-not-burn tobacco devices, and oral nicotine pouches. BAT's products in these three groups are, respectively, Vuse, Glo, and Velo.
Management has leaned heavily into the smokeless category and made much progress. These next-generation products did 3.3 billion pounds ($4.16 billion) in sales in 2023, 12% of BAT's total, across 23.9 million consumers. Management wants the business split evenly between combustible and smokeless alternatives by 2035.
3. The dividend is generous and growing
Who doesn't love a hefty dividend? Tobacco doesn't cost much to produce, which has made tobacco stocks great dividend investments. British American Tobacco yields over 9% at its current share price. Even better, management just raised the dividend by 6.1%, signaling confidence in the business.
Yes, the share price has declined (I'll get to that soon) but getting such a high yield sets a high floor for the stock. You need minimal growth to get to double-digit total investment returns.
4. The dividend is safe, too
A big dividend doesn't mean much if management can't sustain it. Fortunately, BAT's dividend is in great financial shape. The payout only consumes about half of the company's cash flow, and that payout ratio has been relatively consistent, so there shouldn't be too much concern about some unexpected business decline messing things up. Tobacco is famously resilient.
BTI cash dividend payout ratio, data by YCharts.
That makes BAT a potential income machine for investors willing to buy and hold while reinvesting their dividends over time. It can add up quickly!
5. BAT owns 29% of a promising little-known company
Many probably don't realize this, but British American Tobacco owns 29% of a big company that flies under the radar of U.S. investors. ITC is a privately held consumer-products company that is India's largest tobacco company, and is diversified into several other product categories, including food, healthcare, beauty supplies, hotels, paper products, agriculture, and information technology.
British American Tobacco's stake is worth $17.75 billion, roughly a quarter of BAT's current market cap. It's a great balance-sheet asset, and management is reportedly looking to sell a small portion to raise $2.5 billion.
6. The stock is an excellent deal today
Now, to the share price decline. It can be hard sometimes, but investors should look forward instead of backward. BAT's stock trades at a forward price-to-earnings (P/E) ratio of just 6.4. That's a valuation for a company on the verge of going under, which is certainly not the case here. Management is targeting long-term single-digit growth in operating profit.
Even modest earnings growth should drive investment returns from such a low valuation. And investors get that juicy and growing dividend, a business successfully transitioning to smokeless products, and a heck of a poker chip that management can cash in as it pleases.
Add it all up, and British American Tobacco is a table-pounding buy.
