How High Will British American Tobacco Stock Go?

British American Tobacco (NYSE:BTI) is the parent company of tobacco brands including Camel, Newport, Dunhill and Lucky Strike.

Like many tobacco stocks, BTI stands out for its large dividend yields and its ability to pass cash flows back to its shareholders.

With that said, tobacco stocks are looking increasingly risky these days  in light of organic smoking trends and more aggressive regulations on tobacco use.

How high will British American Tobacco shares go, and is the stock’s high dividend worth the risk of investing in what may be a volatile industry going forward?

How Is British American Tobacco Performing?

British American Tobacco has been going through a difficult period over the past two years. In addition to the ordinary struggles of the tobacco industry, the company has had to deal with the loss of sales from Belarus and Russia, where British American found it necessary to liquidate its businesses late in 2023.

For the first half of 2024, the company saw its revenues decline by 8.2% on a year-over-basis. Management now expects to see improvements in H2 when investments in new US commercial activities begin to bear fruit.

One bright spot in the first half of the year report report was a 13.8% increase in diluted earnings per share, though management was quick to point out that this surge was largely due to one-time credits the company had received.

Operating profits were sharply more negative, declining by over 28% year-over-year. This resulted from a significant reduction in operating margin. While margin did decrease, it’s worth noting that the company maintains a respectable operating margin of 34.5%.

How High Will British American Tobacco Stock Go?

British American Tobacco stock is likely to go as high as $40.46 per share according to the consensus of 3 analysts who see approximately 10% upside opportunity.

Interestingly a 10-year discounted cash flow forecast analysis is substantially more bullish with upside opportunity to $55 per share.

On top of an 8% dividend yield that amounts to a potential 18% gain worst case and perhaps as much as 60% in a best case scenario over the long haul.

Is British American Tobacco’s Dividend Worth Buying the Stock?

Like most tobacco stocks, BTI makes up for its generally low price appreciation prospects with an extremely high dividend yield. In British American’s case, the stock currently pays $3.01 and generates an 8.06% yield.

The problem with this dividend for investors is the fact that growth seems to have largely stalled out and the payout amount has been choppy in recent years. Looking back over the last 10 years, the dividend has increased at an anemic annualized rate of just 2.1%.

More recently, there’s even been a temporary drop in the amount the stock pays. Quarterly distributions reached a peak in in 2021, when investors would receive $0.74 quarterly for each share they held.

By early 2023, though, the number was down to $0.70. Today, BTI has regained the ground it lost, but the fact that distributions briefly fell showed that the dividend may not be strong enough for long-term income investors.

British American Tobacco’s Regulatory Risks

As a tobacco company, British American is particularly susceptible to regulatory changes meant to reduce consumption of tobacco and other nicotine products. One change that has the potential to massively impact the company is a proposed generational tobacco ban in the UK.

If passed, those currently under the age of 15 would never be allowed to purchase tobacco products. The same bill would also further restrict the places in which vaping is allowed in the UK.

If this ban is enacted, the effects on BTI could be significant because about 12% of British adults still smoke. With a sudden cap put on its long-term prospects in its home market, British American Tobacco would most likely experience sustained downward pressure on its revenues and earnings.

Though no national ban has been proposed, California has explored the possibility of a similar ban at the state level in the US. If generational bans gain popularity, they could disrupt not only the fortunes of BTI but also of the entire tobacco industry.

Beyond sudden regulatory changes, it’s worth noting that the total number of cigarette smokers has been gradually drifting downward for multiple decades. Price increases have allowed the tobacco industry to stave off the worst effects of the changing market, but there will likely come a point where this strategy breaks down.

Is BTI a Buy?

There is little doubt that BTI shares produce an exceptionally large stream of income for shareholders at the moment. For those seeking immediate income, therefore, the stock may present some real value. Certainly, British American Tobacco’s yield of over 8% is quite appealing in comparison to the S&P 500’s current average of 1.2%.

Looking at a longer time horizon, though, BTI’s investment appeal diminishes substantially. The threat of increased regulatory action against tobacco products, including the possibility of generational bans, could massively interfere with the profitability of the tobacco industry.

An ongoing decline in the number of cigarette smokers in both the US and the UK, meanwhile, puts pressure on the predictability of the company’s performance. Even with the growth of smokeless products improving, these products accounted for just 17.9% of the company’s revenues as of H1 and may not fully replace diminishing cigarette revenues over time.

Taking everything into account, there may not be much more upside left in BTI. Shares peaked in the late 2010s and have remained depressed to some degree ever since.

Meanwhile, even the incredibly high dividend has experienced some volatility in recent years. While the stock will likely continue to kick off a very healthy amount of income for many years to come, investors may be unwise to look for much price appreciation in BTI shares.

For long-term income investors who either haven’t retired yet or are on the threshold of retirement, British American Tobacco shares may present too many risks to be justified by even the company’s remarkable dividend. Those who have been retired for some time and are looking for a higher level of immediate income from their portfolios, however, may still find value in BTI. While the company’s income-generating capabilities certainly shouldn’t be overlooked, the stock may not be a particularly strong buy for those with longer investment horizons.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.