Image source: Getty Images
A rock-solid income stock I like is British American Tobacco (LSE: BATS). This is why.
Smoking corner
Founded in 1902, British American Tobacco is one of the largest tobacco companies in the world, based on sales.
As I write, the shares are trading at 2,488 pence. This time last year they were trading at 3,277p, which is a fall of 24% over a 12-month period.
The falling share price makes the stock more attractive than ever to me with a price-to-earnings ratio of just six. It is worth remembering that many stocks have fallen due to market volatility caused by macroeconomic factors. These include soaring inflation and rising interest rates. The tragic geopolitical events of recent times have added to the volatility.
An Income Stock with a Great Track Record
British American Tobacco has an excellent track record of shareholder returns and consistent performance. It has paid dividends over the past two decades. It even paid dividends during the pandemic period, when many other companies cut or canceled payments.
The stock currently offers a juicy dividend yield of 9.4%. This is significantly above the FTSE 100 average of 3.8%. Furthermore, it seems sustainable to me since the business generates a lot of cash. However, I understand that past performance is not an indicator of the future and dividends are never guaranteed.
According to Action on Health and Smoking, more than one billion people smoke worldwide. That’s about a sixth of the world’s population! Furthermore, most of this adoption occurs in low- and middle-income developing countries, where tobacco controls are less strict. Action on Health and Smoking believes that this figure is only increasing. Companies like British American Tobacco are taking advantage of this and can increase returns and profitability for investors.
Risks and my verdict
Smoking is bad for your health; I doubt many people would disagree with that. For that reason, some investors may stay away from an income stock like British American Tobacco for ethical reasons, and that’s each individual’s prerogative. This may affect investor sentiment.
There is also the looming specter of changes in regulations and laws that could negatively impact sales and performance. This could also potentially affect dividend payments.
Another risk for British American Tobacco and the industry as a whole is the fact that lawmakers are also targeting e-cigarettes. This alternative to smoking has come under more scrutiny recently. In fact, some countries, including major markets like the US and the UK, have recently banned certain vaping and e-cigarette products. This is a development that could hamper future performance and payments.
To conclude, I am a big fan of British American Tobacco as an income stock for consistent and stable dividends. The company has a good business model, strong demand, a great track record of rewarding investors, and also an attractive valuation today.
Next time I have some extra cash, I plan to buy some shares of British American Tobacco for my holdings.
