10.2% yield! Here’s the British American Tobacco dividend forecast to 2025

British American Tobacco shares offer gigantic dividend yields based on current forecasts. But do they make the FTSE 100 share a buy right now?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Asian man drinking coffee at home and looking at his phone

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The British American Tobacco (LSE:BATS) share price is sinking again following last week’s FTSE 100 rally. It’s now down 23% over the past year, meaning the dividend yield smashes the index average based on current dividend forecasts.

Predictions of further dividend growth mean the tobacco giant carries a 9.1% dividend yield for 2023. This sails above the 3.7% forward average for FTSE index shares.

And for 2024 and 2025 yields march to 9.6% and 10.2% respectively. But how realistic are current dividend forecasts? And should I buy the shares for my UK shares portfolio?

Dividend growth

British American Tobacco has lifted shareholder payouts consistently during the past quarter century. It’s a proud record built on the predictable earnings that its addictive products, and the immense pulling power of brands like Lucky Strike and Camel, provide year after year.

As I say, City analysts expect dividends here to continue rising steadily too. Last year’s 230.9p per share reward is tipped to increase to 240.5p in 2023, before rising to 251.9p next year and 269.6p in 2025.

However, there are some red flags investors need to consider when it comes to these estimates. Dividend coverage sits at a less-than-ideal 1.6 times through the next three years. Any reading below two times is said to leave dividend projections in jeopardy.

The firm also has a lot of debt on its balance sheet. While this isn’t abnormal for the business, the company’s adjusted net-debt-to-adjusted-EBITDA ratio stood at 2.9 times at the end of 2022. This is at the upper end of the company’s desired range of two to three times and could compromise future dividend growth.

On the plus side, the tobacco manufacturer’s exceptional cash generation means it could still pay big dividends if it so chooses. Free cash flow clocked just above £8bn in 2022, up 8.1% year on year.

The verdict

On balance, I fully expect British American shares to deliver increasingly large dividends over the next three years. Even if they fall short of forecasts, shareholder payouts are likely to put those of almost all other FTSE 100 shares in the shade.

But that doesn’t mean I’ll buy the company for my investment portfolio. To me, the attraction of market-beating dividends is overshadowed by the prospect that its share price could keep collapsing.

The company will be hoping new chief executive Tadeu Marroco will be able to turn things around here. Some investors are calling on him to launch a new share buyback programme to boost the company’s stock price.

However, I think any buyback scheme would provide only a temporary boost to the share price. The business might be a leader in its industry. But the tobacco sector is in terminal decline, its demise hastened by ever-stricter regulations on the sale, use and advertising of products.

Worryingly for these companies, legislators are also accelerating steps to deter the sale of vapourisers and other next-generation products. Things will be especially bleak for British American Tobacco if products like its Vuse vape kits fail to sell in huge volumes.

So the pull of large dividends in the short term isn’t enough to tempt me to buy. I’d rather buy other FTSE 100 shares for a second income.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »

Investing Articles

Billionaire Warren Buffett just bought shares of Domino’s Pizza. Should I grab a slice?

Our writer takes a look at a few reasons why Domino's Pizza stock might have appealed to Warren Buffett's Berkshire…

Read more »