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One rock-solid income stock I like the look of is British American Tobacco (LSE: BATS). Here’s why.
Smokers corner
Established in 1902, British American Tobacco is one of the biggest tobacco businesses in the world, based on sales.
As I write, the shares are trading for 2,488p. At this time last year, they were trading for 3,277p, which is a 24% drop over a 12-month period.
The share price drop makes the stock more appealing than ever to me on a price-to-earnings ratio of just six. It’s worth remembering that many stocks have fallen foul of market volatility caused by macroeconomic factors. These include soaring inflation and rising interest rates. The tragic geopolitical events of late have added to the volatility.
An income stock with a great track record
British American Tobacco has an excellent record of shareholder returns and consistent performance. It has paid a dividend for the past two decades. It even paid dividends through the pandemic period when many other businesses cut or cancelled payouts.
At present, the shares offer a juicy dividend yield of 9.4%. This is significantly above the FTSE 100 average of 3.8%. Plus, it looks sustainable to me as the business generates lots of cash. However, I do understand that past performance is not an indicator of the future and dividends are never guaranteed.
According to Action on Health and Smoking, over 1bn people in the world smoke. That’s close to one-sixth of the world’s population! Furthermore, the majority of this uptake is in low and middle income developing countries where tobacco controls are less stringent. Action on Health and Smoking reckons this number is only increasing. Businesses like British American Tobacco are capitalising on this and are able to grow performance and investor returns.
Risks and my verdict
Smoking is bad for your health — I doubt many people can disagree with that. For that reason, some investors may steer clear of an income stock like British American Tobacco for ethical reasons, and that’s each individual’s prerogative. This can impact investor sentiment.
There is also the looming spectre of changing regulation and laws that could adversely impact sales and performance. This could potentially impact dividend payments too.
Another risk for British American Tobacco and the industry as a whole is the fact that e-cigarettes are being targeted by lawmakers too. This alternative to smoking has come under more scrutiny recently. In fact, some countries, including major markets like the US and UK, have banned certain vaping and e-cigarette products very recently. This is a development that could hinder future performance and payouts.
To conclude, I’m a big fan of British American Tobacco as an income stock for consistent and stable dividends. The company has a good business model, solid demand, a great track record of rewarding investors as well as an enticing valuation at present too.
The next time I have some spare cash, I’m planning on buying some British American Tobacco shares for my holdings.
