The FTSE 100 index of leading shares contains a lot of companies that are more attractive from an income than growth perspective. One of those now has a yield approaching 9%. It has raised its dividend annually for over two decades. It has also said it plans to keep doing so (although dividends are never guaranteed).
Not only that, but after hitting a new 52-week low share price today, it looks dirt cheap to me. Currently, the share trades on a price-to-earnings ratio of less than 9. For a high-yield FTSE 100 share, I see that as a bargain.
Long-term appeal
In fact, the share is already one of the largest holdings in my portfolio. It is British American Tobacco (LSE: BATS).
I like the fact that the company trades in a sector that has large global demand, low manufacturing costs and high profit margins. The addictive nature of nicotine combined with British American’s stable of premium brands like Lucky Strike means that it has consistently been a free cash flow monster.
As a long-term investor, though, I need to be realistic about the likely ongoing decline in cigarette smoking worldwide. That could hurt both revenues and profits at British American.
Meanwhile, the company’s large debt pile is also a concern to me, especially at a time of rising interest rates. After all, my main interest in British American is for its income prospects. Anything that threatens the company’s future ability to keep paying the dividend is a concern to me.
Quality on sale
That said, in many markets cigarette sales have been declining for decades already. Yet British American continues to perform strongly. Its brands help give it pricing power, meaning it can try to offset shrinking cigarette volumes by boosting prices.
It has also been working hard to grow its non-cigarette business. That might yet turn out to be a significant future growth platform for the FTSE 100 firm.
Investors have marked the shares down, however. Today they have been selling more cheaply than at any point in the past year.
I think the recent sudden announcement of a new chief executive has rattled some investors. But he is a company veteran I think can make sure the company is financially disciplined. In the long run, I regard the investment case for British American as unchanged.
Buy and hold
That is why I have been considering adding to my existing British American Tobacco holding.
At its current price, spending £1,000 on British American shares today ought to earn me almost £90 per year in dividends.
That looks like a great deal to me and I see the recent share price fall as a buying opportunity. If I have spare money to invest, I plan to top up my holding of this beaten-down FTSE 100 giant.
The post 8.8% yield! This FTSE 100 share now looks dirt cheap appeared first on The Motley Fool UK.
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C Ruane 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.
