The big draw with British American Tobacco (BTI +1.69%) today is its huge 7% dividend yield. That's nearly three times the consumer staples average yield of 2.5%. And the dividend looks safe, suggesting that investors worried about market turbulence might want to consider British American Tobacco today. But could buying this tobacco giant set you up for life?
British American Tobacco is a high-yield rock in stormy seas
The defining feature of Wall Street today is heightened volatility. Geopolitical issues and tariff uncertainty have investors whipsawing between deep sell-offs and rapid recoveries. Sometimes the market goes up and down by roughly the same percentage in just a couple of days. It's enough to keep a conservative investor up at night with worry.
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That's why British American Tobacco's 7% dividend yield is so attractive. Most investors expect a return of around 10% from the market over time. This tobacco company's yield gets you 70% of the way to that goal. And the dividend has been increased annually since it switched to a quarterly cadence in 2018. (British American Tobacco is European, and prior to 2018 it paid on a semi-annual basis, as do most other European companies.)
The dividend payout ratio was around 55% in 2024, which is completely reasonable for a consumer staples company. That's doubly true given the addictive nature of British American Tobacco's most important product, cigarettes. If you are looking for a stock to own to help ride out today's stormy market, this could be a good choice.
The long term is the problem with British American Tobacco
That, however, is a short-term view of the situation. Stocks frequently get volatile, and regularly have corrections and even fall into bear markets. Historically, the long-term trend has always returned to a steady upward climb after the volatility subsides. Investors that think long term usually prefer to buy companies with good businesses. This is a trouble spot for British American Tobacco.
The main product British American Tobacco sells is cigarettes. To put some numbers on that, smokable products account for roughly 80% of the company's top line. Cigarettes account for just about 97% of the volume in the company's smokeable products group. Cigarettes are by far the most important product for British American Tobacco.
NYSE: BTI
Key Data Points
In 2024, cigarette volumes declined by 5%. That's not a one-time thing; it is the continuation of a trend, with particular weakness in the U.S. market, where volume was off by 10.1%. British American Tobacco is working to expand into non-cigarette businesses, but the progress has been slow. It remains a long way from the point where what it calls "new categories" products can replace cigarettes.
To be fair, like its peers, British American Tobacco has been able to increase cigarette prices to offset volume declines. But that can only go on so long before price increases make the declines worse. Basically, the company is racing to find a replacement for the cash cow it is currently bleeding dry. Since a replacement hasn't yet been found, dividend investors really can't buy British American Tobacco without worrying that the dividend could someday be at risk.
Time frame matters with British American Tobacco
If your time horizon is short term, British American Tobacco's high yield should probably be enticing. But if your horizon is longer than a few years, you need to take a different view of the situation. This company has a deeply troubled core business and hasn't yet found a way to replace it. Until it has made much more progress on that front, it is hard to suggest that this high-yield stock will be able to set a dividend investor up for life.
