So far 2022 has been a tough time for many FTSE stocks. And things could get even worse as central banks rapidly raise rates to curb inflation and Covid-19 cases rise again.
The wide variety of stocks available on the FTSE 100 mean it hasn’t been a complete washout, however. Some UK shares have emerged as safe-havens owing to their highly defensive operations. Others have simply continued trading strongly in spite of the tough economic landscape.
British American Tobacco (LSE: BATS) is one FTSE share that’s risen since the turn of the year. It’s up 29% since 1 January.
Can the tobacco titan keep going? And should I buy it for my shares portfolio?
A safe play
Tobacco stocks are classic flight-to-safety investments when times get tough. The addictive nature of their products mean revenues at companies like British American Tobacco (LSE: BATS) remain generally strong whatever the weather.
Its trading so far in 2022 confirms this broad rule of thumb. In fact last month it confirmed that it expects sales (at constant currencies) to rise 2% to 4% in 2022.
As an investor I like the terrific earnings visibility that tobacco companies enjoy. And in the case of British American Tobacco I like the brand quality of its cartons that provide profits an extra layer of security. Thanks to the likes of Lucky Strike and Kent the business continues growing its market share.
7.1% dividend yield!
These factors lead City analysts to predict earnings will rise 10% year-on-year. And so the dividend is tipped grow to 231.6p per share. This projection yields an impressive 6.6%.
Things get even better for 2023 as well. Forecasters suggest a 10% rise in annual earnings then, meaning the dividend is expected to rise to 248.9p. This propels the dividend yield to an even better 7.1%.
Dividend cover isn’t the strongest at British American Tobacco. It sits at 1.6 times for the next couple of years, below the safety benchmark of 2 times.
But a strong balance sheet still leaves it in good shape to meet these projections, even if earnings miss. Its ongoing £2bn share buyback programme underlines the massive amounts of cash British American Tobacco produces.
Why I won’t buy the shares
As someone who invests with a long-term view I won’t touch the shares with a bargepole. Legislative actions (like public smoking bans and advertising curbs) have hit cigarette sales hard in the 21st century. And lawmakers continue to concoct fresh measures to make the world smoke-free.
This makes me concerned about profit and dividend levels at British American Tobacco a decade from now. And worryingly, the issue is spreading to the company’s next-generation products like its glo thermal heating products.
Last month for example the European Commission proposed banning the sale of flavoured heated tobacco technologies across the European Union. Growing health fears are leading lawmakers elsewhere to consider adopting similar action as well.
British American Tobacco’s share price might be up in 2022. But it’s still down almost a third over the past five years. I think it could keep falling on a long-term horizon too as tobacco falls out of fashion.
