7. British American Tobacco p.l.c. (NYSE:BTI)
Number of Hedge Fund Holders: 19
Dividend Yield as of July 8: 11.6%
British American Tobacco p.l.c. (NYSE:BTI) is a multinational manufacturer of cigarettes, tobacco, and other nicotine products. The stability of the nicotine market provides a significant advantage to the company, particularly during periods of market downturns. In 2022, for example, when the overall market experienced declines, BAT achieved a 20% return for the year. Despite declining smoking rates in the US, the shift toward vaping has helped to stabilize the tobacco industry. The using of vaping among US adults grew by almost 40% between 2019 and 2023, according to a report by YouGov. These companies also benefit from significant profit margins and require minimal capital expenditures. In addition, they are spared from heavy research and development expenses, enabling them to distribute a solid portion of their earnings to investors.
In response to declining smoking rates in the US, British American Tobacco p.l.c. (NYSE:BTI) has diversified its product portfolio by introducing new offerings. Its New Categories segment, which includes alternative tobacco and nicotine products beyond traditional cigarettes, achieved profitability in 2023. This segment represents the company’s strategy to adapt to changing consumer preferences and regulatory landscapes by offering innovative and potentially less harmful alternatives to smoking. In 2023, the New Categories segment achieved ongoing revenue growth driven by volume, along with increased profitability, particularly led by Vuse and Velo. Consequently, the segment has achieved profitability two years ahead of its initial target. Street analysts have maintained a consensus Buy rating on BTI with a $34 price target, showing an upside potential of 7.70%.
British American Tobacco p.l.c. (NYSE:BTI) has a strong cash flow situation, which is important from a dividend point of view. In 2023, the company’s operating cash flow came in at £10.7 billion ($13.53 billion) while its free cash flow before dividend payments sat at £8.3 billion ($10.49 billion). The company also remained committed to its shareholder obligation, returning more than £5 billion ($6.32 billion) to investors through dividends in 2023. Its cash flow outlook is also positive, which promises consistent dividend payments in the future. The company expects to generate £40 billion ($50.57 billion) in free cash flow before dividends over the next five years.
Moon Capital Management, LLC also highlighted British American Tobacco p.l.c. (NYSE:BTI) strong cash position in its Q1 2024 investor letter. Here is what the firm has to say:
“We recently acquired shares in British American Tobacco p.l.c. (NYSE:BTI). It’s certainly no secret that the tobacco industry faces significant regulatory challenges, particularly in the U.S. combustibles sector. (Combustibles are traditional cigarette products that, when lit, the combination of the tobacco (fuel) and oxygen in the air produces a self-sustaining combustion process that consumes the tobacco. This contrasts with various heat-not-burn products, including e-cigarettes.) Despite these headwinds, however, BTI has organically grown its revenue by more than 4% annually over the last five years. The company’s operating profit has also risen more than 5% per year, even as the company has distributed massive dividends. (The company currently pays a dividend yield of 10%.)
BTI’s current free cash flow yield exceeds 16% – a figure that climbs even higher when adjusted for the company’s non-operating strategic investments. The largest of these is a 29% stake in Indian tobacco company ITC, which is worth more than £14 billion, or 27% of BTI’s entire market cap of £52 billion. On this market cap, the company expects to generate £40 billion in free cash flow over the next five years. Despite significant investments in its reduced-risk businesses, BTI’s free cash generation has remained robust, growing consistently over the past five years. Yet despite this impressive track record, the stock has traded sideways for more than a decade…” (Click here to read the full text)
On June 27, British American Tobacco p.l.c. (NYSE:BTI) declared a quarterly dividend of $0.743 per share, which fell in line with its previous dividend. With a dividend yield of 11.6% as of July 8, BTI is one of the best dividend stocks with over 8% yield.
At the end of March 2024, 19 hedge funds tracked by Insider Monkey reported having stakes in British American Tobacco p.l.c. (NYSE:BTI), down from 22 in the previous quarter. These stakes are collectively valued at over $588.6 million.
