Among FTSE 100 heavyweights, British American Tobacco (LSE: BATS) is like British yeast spread Marmite. You either love it (as Neil Woodford and other income-oriented fund managers do) or hate it (as anti-tobacco activists do). Either way, it’s hard to ignore BAT, as it’s been one of the FTSE 100’s top dividend payers going back decades.
BAT is a ‘bad’ FTSE 100 business
BAT is a very simple multinational business – and has been since it was founded 118 years ago in 1902. By sales, it is the largest cigarette maker in the world and also manufactures tobacco and other nicotine products.
Though smoking is in decline globally, the firm’s position as market leader still enables it to raise prices and grow. But, of course, smoking is highly addictive, harmful, and often fatal, so BAT is the very opposite of an ethical business.
BAT is a brilliant FTSE 100 business
Ethics aside (and I speak as a lifelong smoker), BAT is an absolute powerhouse of the FTSE 100. As I write, its shares trade at 2,585p, valuing this titan at £59.3bn.
From an investment standpoint, what’s awesome about BAT is that it is one of the biggest dividend payers in the entire FTSE 100. Indeed, in its half-year results released today, the company committed to paying out almost two-thirds (65%) of its earnings in cash dividends to shareholders. Nice.
BAT bounces back from Covid-19
In its half-year results, BAT unveiled revenues of almost £12.3bn, up a modest 0.8% year on year. However, profit from operations surged a sixth (16.4%) to £5.1bn, aided by a 5.5 percentage-point increase in its operating margin to 41.5%.
Basic earnings per share (EPS) leapt 22.7% to 151.2p, as did diluted EPS to 150.7p. Net cash generated from operating activities soared 52.3% to nearly £3.5bn, while net debt rose just 0.3% to £50.4bn.
BAT is a FTSE 100 fortress
BAT’s latest set of figures were more upbeat than previous updates. This is largely due to smokers puffing on premium brands during the pandemic, despite earlier warnings of downgrades and depressed volumes. US sales were notably resilient, thanks to government stimulus payouts allowing smokers to stick with familiar brands.
Then again, falling sales in emerging markets and at duty-free outlets such as airports hit sales volumes. Sales slid 6.3% to 315bn fags. Likewise, the ongoing tobacco sales ban to curb the coronavirus has driven South African sales onto the black market.
Good results make BAT shares cheaper!
Although BAT has been a favourite among income investors for decades, this latest news sent its shares lower in a weak week for the FTSE 100. Currently, the share trades at 2,585p, down 72p (2.7%) today – which is good news for income-hungry investors looking to buy now.
BAT shares are cheap and offer a bumper dividend almost unmatched anywhere else in the FTSE 100. They trade on a price-to-earnings ratio below 10.5 and a dividend yield of 8.1%. They are also more than £9 cheaper than they were in mid-January. That’s why I’d happily buy and hold them today for income.
