With a 10% dividend yield, should this be the first FTSE 100 stock I buy in 2024?

This FTSE 100 share price has fallen 25% in a year, but the dividend yield is now up in double digits. And it’s forecast to rise further.

| 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.

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.

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.

We’re starting a new year, which means many of us are planning ahead for our FTSE 100 investments.

The trouble is, I can’t remember a start to a year when we’ve been more spoiled for choice. We had a lot of superb cheap stocks to pick in 2023. And now, I’d say the stock market outlook is brighter. Yet those cheap shares still look super cheap to me.

So what’s this 10% dividend yield? It’s British American Tobacco (LSE: BATS).

Share price down again

After a surge in 2022, the share price has collapsed again.

The stock’s price-to-earnings (P/E) ratio is now down to a bit over six. For any company that’s not about to go bust, I reckon that could be a steal. So what’s wrong now?

Well, forecasts show a bit of a wobble in the next couple of years. Nothing big, but just a slight fall in earnings.

Has that spooked the market into thinking the inevitable end of the tobacco industry is a bit closer now? Maybe.

Not so bad

But I don’t think I see cause for alarm. The softer forecast for 2024 comes after what looks like a bumper year in 2023. We should have those results on 9 February.

And I think fears for the decline of the industry are overdone. I was hearing the same 10 years ago, and the years since have brought more profit growth and big dividends.

There’s an ethical thing too, and that does concern me — each of us, of course, needs to decide on that for ourselves.

But I do like the way the firm is putting so much into new kinds of products. In a December update, CEO Tadeu Marroco said: “We now expect New Categories to be broadly breakeven in 2023, two years ahead of our original target.” That’s impressive.

Outlook

In fact, the whole thing was big on this ‘Building a Smokeless World’ drive, and the board aims to get 50% of revenue from non-combustibles by 2035.

It also said: “We will continue to reward shareholders through our strong cash returns, including our progressive dividend, and, once the middle of our leverage range is reached, we will evaluate all opportunities to return excess cash to our shareholders.

That bodes well for the headline 10% dividend yield. Analysts seem to think it will rise a bit in the next two years too. They have it at 11% by 2025.

Bottom line

Now, I can’t ignore the risk here. There’s the long-term risk to the business, even with the shift to new product types. In the time between now and 2035, and that 50% revenue aim, who knows what might happen?

I also see a fair chance we could be in for a long spell of weak British American share prices, through market fears. That P/E of six could be here for some time… or even fall.

But the 10% dividend does look good to me. I put this in my top five FTSE 100 candidates.

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.

Alan Oscroft 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

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

10% dividend growth! 2 FTSE 100 stocks tipped to supercharge cash payouts

These FTSE 100 stocks have strong records of dividend growth. And they're expected to keep on delivering, as Royston Wild…

Read more »

Investing Articles

Down 17% in a month and yielding 7.39%! Is this FTSE 100 share a screaming buy for me?

When Harvey Jones bought Taylor Wimpey last year he thought this FTSE 100 share was a brilliant long-term buy-and-hold. Has…

Read more »

Investing Articles

Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

Is it realistic to put £20k in an ISA now and earn over half that amount every year in passive…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

If I could only keep 5 UK stocks from my portfolio I’d save these

Harvey Jones is running through his portfolio of top UK stocks to see which ones he couldn't bear to do…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

I’m aiming for a million buying unexciting shares!

By investing regularly in long-established, proven and even rather dull businesses, this writer plans to aim for a million. Here's…

Read more »

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »