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I’ve been writing for The Motley Fool for 17 years or more but in all that time I’ve never once considered buying British American Tobacco (LSE: BATS) shares. Am I mad?
I’ve both read and written countless pieces praising it as one of the most reliable dividend and growth machines on the FTSE 100. Yet early on I drew a line. Tobacco was a bad thing, so I wouldn’t buy cigarette makers. I never preached about it. I just didn’t want to buy a company whose core business kills people.
I wouldn’t call myself an ethical investor. I hold alcohol via Diageo. I invest in weapons through BAE Systems. I even hold Ocado Group, which isn’t unethical as a business, but as an investment has done disreputable things to my portfolio. Yet I snubbed cigarette makers. Everyone sets their own boundaries and that happened to be mine.
Long-term FTSE 100 compounder
Now I’m beginning to question the cost of my high-minded stance. British American Tobacco has done quite nicely without my backing. It still sells around 500bn sticks a year and has a market cap of £95bn. The shares have done brilliantly. Around the turn of the millennium they traded around 325p. Today they’re around 4,376p, a rise of 1,247%.
That actually understates the total return because reinvesting dividends would have multiplied the gain. That’s the beauty of this stock. It sells an addictive product, so people keep coming back through every boom and every recession. The business throws off a mountain of cash and that has allowed the board to lift shareholder payouts every single year this century. Over the last 15 years the dividend has grown at an average annual compound rate of around 5.05%. Even Covid didn’t interrupt it. Smokers may have faced an elevated health risk but they kept puffing.
While smoking is fading across the West, it remains embedded in many emerging markets, and vaping has opened up fresh avenues for growth everywhere.
Income attraction
At times the stock has yielded 8% or 9%. The trailing yield is roughly 5.4% today, which looks lower only because the share price has surged lately. The British American Tobacco share price up around 44% over one year and 70% over two.
Despite that strong run, the price-to-earnings ratio is just under 12, well below the FTSE 100 average of around 18. Yet I’d be wary of buying today after such a strong run. RBC Capital Markets has raised doubts about whether the newer product lines will deliver hoped-for margins, claiming expectations are “seriously overblown”. Health risks around vaping could hit demand or trigger tougher regulation. That fundamental risk has never gone away.
For others, British American Tobacco may still be worth considering today, especially for long-term dividend hunters. As for me, I think I’ll leave it. It feels too late to change my habits. The good news is that there are other FTSE 100 dividend growth shares that excite me just as much. I’ll stick with them.
