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British American Tobacco (LSE: BATS) shares have achieved very well over the previous yr, rising round 32%. That’s not together with the high-yield passive revenue on prime.
The mixture of share value appreciation and dividends has made this an amazing inventory to personal since I purchased it 12 months in the past.
Right here, I’ll take into account whether or not I can purchase extra shares for my portfolio, and what number of I’d must generate £1.5k a yr in dividends.
Passive revenue potential
Once I purchased this FTSE 100 share, the forward-looking dividend yield was an eye-popping 9.9%. It’s at the moment decrease as a result of increased share value, nevertheless it nonetheless is available in at 7.7% for this yr and round 8% for 2026.
| Yr | Dividend per share | Dividend yield |
|---|---|---|
| 2024 | 236p | 7.5% |
| 2025 | 244p | 7.7% |
| 2026 | 252p | 8% |
In fact, these are simply forecasts and no payout is ready in stone. However the tobacco agency generates loads of surplus money, and I’m inspired that these potential payouts are lined round 1.5 instances by forecast earnings.
Put one other approach, British American pays out roughly two-thirds of its earnings as dividends. Personally, I’d be very stunned if the payout was reduce within the close to time period.
Assuming the £2.52 dividend per share is met, this implies I’d must personal roughly 595 shares to purpose for £1,500 in passive revenue subsequent yr. I’m utilizing 2026’s forecast determine as a result of I don’t personal that many shares but, and there are different issues past yield for me to contemplate right here.
Falling volumes
The forward-looking price-to-earnings ratio is round 8.8, which implies the inventory nonetheless seems low-cost. However on a price-to-sales foundation, the inventory appears extra expensive at 2.7.
Both approach, many would argue {that a} low valuation is warranted. In any case, the corporate nonetheless generates round 80% of its income from cigarettes manufacturers resembling Dunhill, Fortunate Strike, and Rothmans. And cigarette volumes fell by round 5% in 2022, 2023 and 2024. They’re projected to maintain falling too.
British American is offsetting these quantity declines with value will increase, which helps the lofty dividend yield for now. However sooner or later its smokeless merchandise like vapes, heated tobacco and nicotine pouches must begin taking over a few of the slack.
The corporate’s imaginative and prescient is one the place people who smoke have migrated from cigarettes to smokeless options. It goals for not less than 50% of income from these next-generation merchandise by 2035, up from 17.5% final yr.
Nevertheless, we don’t know whether or not they are going to show wherever close to as worthwhile as cigarettes, particularly as they’ve a lot decrease manufacturing and distribution obstacles. This implies there’s much more competitors.
If these smokeless merchandise don’t show to have a lot pricing energy, I believe there is perhaps some backsliding on targets. We’ve seen this dynamic play out lately with BP, which is lowering investments in renewable vitality and rising give attention to oil and gasoline manufacturing. In different phrases, its bread and butter.
Ought to I purchase extra shares?
Upon reflection, I’m pleased with the scale of my holding on this inventory for now. If it sells off, I could rethink.
The subsequent quarterly cost of 60p per share is due on 7 Might. What I’ll do is reinvest that money into different dividend shares in my portfolio, in all probability Authorized & Normal or Aviva.
