British American Tobacco's Huge Yield Is Safe for Now, But Keep an Eye on This Troubled Division

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Reuben Gregg Brewer, The Motley Fool

Sun, Apr 6, 2025, 9:15 AM 5 min read

The large crushed to bargain British American Tobacco (NYSE: BTI) is its lofty 7.1% dividend yield. That's an charismatic yield, but the broader marketplace is yielding thing astir 1.2%, and the mean user staples stock's output is 2.6%. That suggests there's further hazard surrounding an concern successful British American Tobacco.

Indeed, determination is, and this 1 part of the institution highlights what you request to beryllium watching.

As its sanction implies, British American Tobacco is a baccy company. It sells baccy and different nicotine-related products crossed assorted antithetic transportation forms. However, combustible baccy items marque up astir 80% of its revenue. Cigarettes relationship for astir 97% of the measurement of the combustible products it sells. So, for the astir part, British American Tobacco is simply a cigaret company.

A idiosyncratic breaking a cigaret successful half.

Tobacco is classified arsenic a user staple. Consumer staples stocks mostly marque products that radical request to bargain connected a regular basis, similar toothpaste, toilet paper, and food. Given that utilizing nicotine products is simply a choice, not a necessity, it seems similar an unusual fit. But the addictive quality of nicotine changes the crippled a small since consumers thin to support buying their smokes nary substance what is going connected successful the world.

This is simply a large affirmative for British American Tobacco with respect to its dividend. Its cigaret concern provides reliable currency travel to enactment the ample payout. In 2024, the company's adjusted net payout ratio was astir 66%, which is connected the precocious broadside but not unreasonable. The dividend is apt to beryllium harmless implicit the adjacent term.

The hazard that British American Tobacco faces is that it is dealing with a semipermanent diminution successful cigaret volumes. In 2024, measurement dropped 5%. In 2023, the diminution was 5.3%. And successful 2022, it was 5.1%. This is an ongoing problem, and it isn't unsocial to British American Tobacco.

That said, British American Tobacco's measurement declines are fractional the level of Altria (NYSE: MO). In 2024, Altria's measurement fell by 10.2%, which was painful. However, there's a nuance present that's important erstwhile making this comparison. Altria lone sells cigarettes successful North America. If you excavation into British American Tobacco's fourth-quarter 2024 net release, you'll spot that its U.S. cigaret concern experienced a measurement diminution of 10.1%. That's fundamentally close successful enactment with what Altria is seeing successful its business.

Both companies are offsetting their measurement declines with terms increases. However, that tin spell connected for lone conscionable truthful agelong earlier a tipping constituent is reached, and the terms increases extremity up making the measurement declines worse.

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