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Dividends are the principle attraction for traders who purchase British American Tobacco (LSE:BATS) shares. Its addictive merchandise end in sturdy money flows, the lifeblood of any firm’s dividend coverage.
British American’s raised annual dividends constantly for many years. It’s a development Metropolis analysts tip to proceed, that means dividend yields that comfortably beat the FTSE 100‘s 3.1% common.
12 monthsDividend per shareDividend yield2025243.61p5.8percent2026248.93p6percent2027257.47p6.2%
If present projections are right, a £20,000 funding in British American shares at this time will ship complete dividends of £2,730 to the tip of 2027.
But dealer forecasts are by no means set in stone. So how life like are present dividend projections? And extra broadly, ought to traders contemplate including the tobacco titan to their portfolios?
Excellent news!
On the primary query, issues are wanting good on the dividend entrance. British American stays flush with money, illustrated by its dedication to substantial share buybacks.
Simply at this time (9 December), the corporate introduced plans to repurchase one other £1.3bn price of fairness in 2026. Profitable debt discount can also be reinforcing these plans — British American expects leverage to drop to 2 to 2.5 occasions by the tip of subsequent yr.
On the draw back, dividend cowl isn’t practically as sturdy because the steadiness sheet. And this creates some threat.
Anticipated payouts are coated between 1.4 and 1.5 occasions by anticipated earnings by means of to the tip of 2027. Readings are far beneath the accepted safety benchmark of two occasions. They usually go away little room for error if income are blown astray.
Is that this a dealbreaker for tobacco shares like this,although? I believe not. As soon as once more, the addictive nature of nicotine merchandise means earnings are unlikely to be blown far astray from what brokers predict.
Certainly, weak dividend cowl has lengthy been a characteristic of this reliable dividend grower.
So what’s flawed?
The prospect of extra juicy dividends is actually interesting. However there’s much more to British American’s funding case than simply passive earnings.
And as cigarette utilization steadily declines, I’m aware that its share value may steadily crumble. At present the agency repeated predictions of a 2% international tobacco market contraction in 2025.
Manufacturers reminiscent of Fortunate Strike and Dunhill are serving to to maintain the wolf from the door for the time being. Accelerating demand for its non-combustible merchandise (like its Vuse vapes) can also be boosting the highest line. The corporate noticed a 2% rise in group gross sales in 2025.
But it surely’s a matter of time earlier than worries over the gross sales outlook emerge, in my view. The world continues to maneuver in direction of a smokeless world, and new classes are underneath elevated scrutiny from regulators as properly. There’s additionally a large drawback of trade counterfeiting, particularly within the US.
Is British American a Purchase?
I don’t assume these dangers are baked into British American’s sky-high valuation. At £41.75, the corporate trades on a trailing price-to-earnings (P/E) ratio of 31 occasions.
That’s considerably above the five-year common of 13.5 occasions, and displays the corporate’s 42% share value rise this yr.
I received’t be shopping for British American shares myself. However it could be price contemplating for traders who’re extra assured within the broader tobacco market.
