Tobacco companies used to be among the stock market favorites. And with their cash flows growing every year, they've made a lot of money for shareholders over the long term. But that has changed in recent years.
Over the past ten years, Laqsla (NYSE: BTE) – one of the largest tobacco/nicotine companies in the world – produced a total return of negative 6%, while… Standard & Poor's 500 Up to 231%. This includes the strong dividend payments it distributes to shareholders every quarter.
today is Profit return It rose to just under 10%. With technology stocks rising to all-time highs, this forgotten tobacco giant looks increasingly undervalued. Is British American Tobacco an income investor's dream now?
Smoking business is declining, but cash flows are strong
British American Tobacco owns some of the oldest global cigarette brands. These include Dunhill, Newport, and Camel. While these brands have maintained market share in the cigarette segment for decades, the overall rate of smoking is declining worldwide, impacting shipment volumes. To counter the impact of this volume decline on its financials, British American Tobacco has continually raised cigarette pack prices.
You can see the results of that strategy in the company's consolidated financial statements. In fact, British American Tobacco's revenues have risen by 5.7% over the past five years, despite a decline in cigarette use around the world. Over the next five years, the company expects to generate more than $50 billion in free cash flow. For a company with a market capitalization of just $68 billion, this demonstrates the potentially discounted valuation that British American Tobacco is currently trading at.
But these price hikes can't drive cash flow forever, right? Eventually, most people will stop smoking cigarettes. This is where its new technological products come into play.
Growth could come from new nicotine products
Almost everyone is aware of the health damage caused by smoking cigarettes. The same applies to the executive team at British American Tobacco. For this reason they have been working on building and purchasing other nicotine products to replace cigarettes among the adult population. These include nicotine pods, vaping, and heat-and-non-burn cigarette devices. These products may have fewer adverse health effects compared to cigarettes.
Shareholders should benefit too. The company's “New Categories” segment delivered revenue growth of 21% on an organic constant currency basis in 2023 and should reach $5 billion in annual revenue soon. Of course, since this is a global company, this may be affected by foreign exchange rates. The sector finally reached profitability last year, generating positive contribution earnings for British American Tobacco for the first time ever.
Over the next 10 years and beyond, these new products can drive volume growth for the company and hopefully offset the eventual decline in profits that will come to the cigarette business.
Are dividends sustainable?
Volume growth of new products is fantastic. But income investors care about one thing above all else: dividend payments. At today's share prices, British American Tobacco has a dividend yield of close to 10%. This makes it one of the highest-yielding stocks in the world, which may make some investors skeptical about the sustainability of returns.
When you look at the numbers, it's clear that British American Tobacco already has plenty of scope to maintain its dividend payout at its current level, and will likely be able to increase it in the coming years. Free cash flow — what companies post to cover their dividends — was $5.30 per share over the past 12 months. Its earnings currently stand at just $2.90 per share.
Even if the cigarette business performs worse than expected over the next few years, British American Tobacco has plenty of room to maintain its current dividend, so income investors can rest easy owning the cash-generating nicotine giant.
Should you invest $1,000 in British American Tobacco now?
Before you buy shares in British American Tobacco, consider the following:
the Motley Fool stock advisor The analyst team has just defined what they think it is Top 10 stocks Let investors buy it now… and British American Tobacco wasn't one of them. The 10 stocks that were discounted could deliver huge returns in the coming years.
Think when Nvidia I prepared this list on April 15, 2005… If you invested $1,000 at the time of our recommendation, You will have $671,728!*
Stock advisor It provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. the Stock advisor The service has More than four times The return of the S&P 500 since 2002*.
*Stock Advisor returns as of May 28, 2024
Brett Schiffer He has no position in any of the stocks mentioned. The Motley Fool recommends British American Tobacco Plc and recommends the following options: long January 2026 $40 calls on British American Tobacco and short January 2026 $40 calls on British American Tobacco. The Motley Fool has Disclosure policy.
Forget buying a rental property: Passive investors should buy this amazing stock with a 10% yield instead Originally published by The Motley Fool
