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.
