I own several dividend shares in my Stocks and Shares ISA. As they’re usually large, mature and established companies, they tend to be less volatile than my small-cap or growth stocks.
British American Tobacco (LSE:BATS) is one dividend share that I’d buy more of if I had spare cash.
As a tobacco stock, it provides some defensive exposure to my portfolio. And as the world heads for a recession, I’m keen to own even more of these defensive shares right now.
BAT currently offers a dividend yield of 6.5%. That’s not the largest in the FTSE 100 index, but there’s more to dividend shares than just the yield.
That said, if I buy 150 shares today for around £5,000, I should receive over £325 in dividends every year.
Reliable dividend shares
Bear in mind that dividends aren’t guaranteed. Companies can cut payments at any time, especially if their earnings become uncertain for whatever reason.
However, one reason why I like BAT is because of its long dividend history. It has consistently been paying dividends to shareholders for decades. In booms and busts, it continued its payouts.
That gives me some confidence in its ability to continue to do so, even in a recession. Also, as dividends are typically paid from earnings, I like that it benefits from stable cash flows.
Last year it churned out £9.6bn of free cash flow. It might not be in the most popular sector, but it’s highly cash-generative. And much of it this cash is returned to shareholders through share buybacks or dividends.
A dying industry?
But isn’t smoking a dying industry? Well, it’s true that cigarette sales are slowly falling. These products are frequently targeted by government regulations and campaigns to reduce usage. Also, consumers’ focus on health and wellbeing has reduced smoking rates.
That said, falling sales are more than offset by higher prices. As such, BAT’s profit continues to climb higher.
Also, like many of the large tobacco companies, this one is on a mission to grow its e-cigarettes business. This new product category is smaller but growing fast. It’s reassuring that it has been growing by 31% a year in the past four years. And management expects sales to reach a massive £5bn by 2025.
Undervalued opportunity
One thing I’d note is that its share price is still considerably lower than the highs reached in 2017. That’s despite years of it previously climbing steadily higher. I’d say that’s down to its debt burden.
Having borrowed a considerable sum to fund an acquisition in 2017, it’s still paying back its dues. That said, as it’s manageable and the company has plenty of regular cash coming in, I’m not too concerned by this.
In fact, I reckon the depressed share price could potentially be an opportunity to buy an undervalued share.
Overall, I see it as a highly cash-generative and profitable business. With a price to earnings ratio of just eight, it looks cheap to me. And with a 6.5% yield, I’d happily buy more of these dividend shares if I had spare funds.
