The pandemic and the ensuing hangover have seen markets take a hit in the last few years. But I’m looking for the positives. While share prices are beaten down, that does mean higher yields. With that, I’m looking at income shares. Should I these two today?
Tobacco powerhouse
With a yield of 9.8% as I write, I’m watching British American Tobacco (LSE: BATS) like a hawk. I’m a shareholder. Yet I‘m tempted to top up my holding. It looks cheap, trading on an earnings multiple of around six.
The biggest risk with British American Tobacco is the declining popularity of smoking. Governments around the world are pushing to create a ‘smoke-free’ society and it seems to be working. In an early December update, the business announced it was to write down the value of some of its US cigarette brands. Including names such as Lucky Stripe, this will total £25bn. While the tough economic environment certainly played its part, the firm also pinned it down to the rise of “illicit modern disposables”. This will no doubt continue to be an issue going forward.
That said, the firm is aware of this and as such is diversifying away from its traditional income streams. It plans to generate 50% of its revenues from nicotine alternatives by 2035. With its New Categories division, it’s making good headway. It’s on track to break even two years ahead of schedule. It’s upping its investment into this area in the years ahead.
Only time will tell whether this proves to pay dividends. While it looks cheap, I’ll be waiting for the smoke to clear before deciding on my next move. I’m content with the exposure I have to the company for now.
Telecoms behemoth
There are only a few companies that offer a higher yield than British American Tobacco. Vodafone (LSE: VOD), at a whopping 12%, is one of them.
One reason for its double-digit yield is due to a sharp decline in its share price this year. Yet trading at just six times earnings, would I be smart to buy?
Under new CEO Margherita Della Valle, the business has looked to reverse its poor form of late. It has heavily underperformed in the last few years. Della Vale is hoping to change this. Most recently, it attempted to streamline by offloading its Spanish business in a deal worth €5bn.
It’s also seen growth in Germany, which is one of its core markets. For Q2, revenue grew 1.1% for the region. That’s an improvement on the small loss seen in Q1. Growth in Africa, where revenues jumped 9%, is another encouraging sign.
While its expansion is a positive, one issue is the large amount of debt the business has incurred to fuel this growth. Currently, this sits at €36bn, which is a rather sizeable pile. Higher interest rates won’t help in reducing it. There’s also the issue of rising costs. Its margins have been squeezed as inflation continues to linger.
While its yield is attractive, I’m also concerned about its sustainability. At its current rate, I’m not sure it can survive. For that reason, I’m keeping Vodafone on my watchlist for now.
