The annual yield of UK stock British American Tobacco (LSE: BATS) was just increased to a stunning 7.6%. However, the company, famous for its cigarettes brands like Dunhill and Lucky Strike, is considered a controversial ‘sin stock’. Am I buying? Well, let’s start with just how terrific that dividend is.
Fifth-largest dividend
The London-based cigarette manufacturer British American Tobacco (BAT) is the world’s largest tobacco company by sales, and its dividend policy is truly outstanding. The company aims for 65% of earnings paid out to shareholders along with an increase every single year.
Right now, that’s resulted in a 7.6% yield which is the fifth-largest annual payout on the FTSE 100 and nearly double the average of around 4%.
That means a £20,000 stake in the company would return £1,520 over a year. And if I believed BAT could continue that payout long-term, a £20,000 stake at 7.6% for 30 years would grow into over £180,000. However, I can’t ignore one very big problem with this company.
More smokers than ever
One of the disadvantages of a ‘sin stock’ like a tobacco company is the incentive for individuals and governments to reduce consumption. It’s worked with smoking in the UK, where the percentage of adults who smoke is down from 40% in 1980 to only 13% in 2021.
BAT may be British but it’s the second-largest cigarette company the world over. Its brands like Dunhill and Lucky Strike are popular globally, and the number of smokers worldwide is higher today than at any point in history. It’s for this reason that BAT has gone from strength to strength, outperforming the FTSE 100 for decades.
But looking forward? It’s hard to see anything other than a long-term decline in cigarette use. Some predictions put the UK to be a smokeless country by 2050, and I’d imagine other countries will see a similar decline as time goes on. So what is BAT doing about it?
Vaping products
BAT produces its own line of electronic cigarettes – also known as vapes or non-combustibles. The latest figures from 2022 show 22.5m adult users and average user growth of 30% for each of the last four years.
Despite this growth, non-combustibles still only make up 14% of the company’s total revenue. It’s higher in developed countries, with the percentage standing at 46% in the UK and 74% in Sweden.
The crux of the problem is that not everyone who gives up smoking buys a vape. The adult population who uses non-combustible products in the UK is estimated to be only 7%, which doesn’t bode well for this stock long term.
My move
Is it a buy for me? If I was looking for a solely income-focused stock for the short term, it would be a yes. But with the headwinds and uncertainty in the long run, I think there are better options out there at the moment.
