For investors on the hunt for quality income stocks, I reckon British American Tobacco (LSE: BATS) is worth investigating.
A subpar performance…
Granted, it hasn’t posted the greatest performance in recent times. The last 12 months have seen 21.1% shaved off its share price. Zooming out, in the last five years it’s down 22%.
It’s no secret that the tobacco industry is under immense scrutiny. And this threat will continue, with governments from a host of nations tightening legislation. For example, anyone aged 15 or younger in 2024 will never be able to legally buy cigarettes under a recent UK government law.
Across the pond, the company has also experienced issues. Last year, it wrote down the value of its US combustibles division by £27.3bn.
… Or an opportunity?
But then again, could its beaten-down price actually be an opportunity for savvy investors? I reckon there’s certainly a case to be made.
The risk is that governments across the globe are cracking down on smoking. But the habit won’t disappear overnight. It remains a massive market for now. Last year, the company sold 555bn cigarettes as it posted £27.3bn in revenue. Those are huge figures we’re talking about.
It’s also a business with geographical diversity and the ability to perform resiliently regardless of the macroeconomic environment.
That means its current share price could be a steal. And to be fair, trading on a price-to-earnings ratio of just 6.3, the stock does look dirt cheap.
Time to pivot
The business is also aware of the headwinds it will face. To counteract this, British American Tobacco is pivoting towards its ‘New Categories’ division, although this remains much smaller than its main business for now. This unit has brands such as Vuse and Velo under its umbrella, which are growing in popularity. Last year, organic revenue for this division rose 21% and now makes up 16.5% of total group revenue.
This feeds more widely into the company’s strategy to build ‘A Better Tomorrow’ by working towards a smokeless world. By 2035, the group is targeting 50% of its revenue to come from non-combustible sales.
A solid track record
There’s also a very important factor I’m yet to highlight. The stock has an incredible 10% dividend yield. That’s the third highest on the FTSE 100.
What’s more, British American Tobacco has a track record of increasing its payment since 2000. That’s incredibly impressive considering during that time we’ve been through events such as the Global Financial Crash and the pandemic.
Looking ahead, management has confirmed it remains “committed to dividend growth in sterling terms”.
A top buy?
Smoking’s a habit that’s falling in popularity and for many investors British American Tobacco’s a stock that’s well and truly out of fashion, which is a negative for share price growth.
But for those who are keen to pick up out-of-favour value shares with meaty yields, I reckon it could be a stock to consider buying. If I didn’t already own some of its shares, I’d happily snap some up today.
The post Down 21% and yielding 10%, is this income stock a top contrarian buy now? appeared first on The Motley Fool UK.
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Charlie Keough has positions in British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
