We recently compiled a list of the 10 Best FTSE Dividend Stocks To Buy Now. In this article, we are going to take a look at where British American Tobacco p.l.c. (NYSE:BTI) stands against the other FTSE dividend stocks.
The first half of 2024 has been notable for the UK equity market, as the FTSE 100, the benchmark index for UK company shares, hit a record high. However, stocks tumbled in the first week of June as financial shares mirrored broader losses in European markets. That was mainly due to the political uncertainty that unsettled investors and a slump in industrial mining stocks further dragged down the market. That said, with some time remaining in the general elections, there is still some potential for additional developments and surprises within the UK market. The index is up by nearly 6% this year so far, compared with a 14.3% return of the broader US market
The Bank of England (BoE) was one of the first central banks to begin increasing interest rates after the peak of the COVID pandemic. From December 2021 to August 2023, it raised the bank rate by 515 basis points to a 16-year high of 5.25% in order to address rising inflationary pressures in the economy. According to a Reuters poll of economists, the BoE is expected to begin cutting interest rates in August. Most economists also anticipate at least one more rate reduction this year, despite ongoing high inflation in wages and services. Yael Selfin, chief UK economist at KPMG, made the following comment on the situation:
“While we are seeing some tentative signs of cooling in the labor market, service sector inflation remains persistently high and it is likely the MPC would want to wait until the next set of forecasts and a few more data points before it embarks on its first rate cut.”
Overall, UK inflation is expected to remain slightly above the BoE’s target of 2.0% in every quarter until at least the end of 2025, according to the poll. Median forecasts indicated that inflation would average 2.5% this year and 2.2% next year.
After reaching new highs in 2024, the FTSE 100 may attract more investors, particularly those focused on income accumulation. The projected dividend yield of 3.8% for 2024 and 4.1% for 2025 is appealing, especially since these yields surpass the current inflation rate. Analysts predict that the ten largest dividend-paying companies in the UK will return £43.9 billion to shareholders, accounting for 55% of the total dividends from the FTSE 100. The top 20 companies are expected to contribute £57.4 billion, making up 72% of the total dividends.
In 2023, UK dividend growth of 5.4% aligned with the global average, according to a report by Janus Henderson. This increase was driven by substantial dividend increases from banks and oil producers, although it was tempered by lower payouts from mining companies. The report further mentioned that annual dividends in the UK grew to $86 billion in 2023 from over $63 billion in 2020.
While investors gravitate toward American dividend stocks, some of the best FTSE dividend stocks also offer similar investment opportunities.
Our Methodology:
For this article, we scanned through the list of FTSE stocks and picked dividend stocks from the list. From the resultant dataset, we picked the 10 best FTSE dividend stocks with the highest number of hedge fund investors tracked by Insider Monkey as of Q1 2024. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A close-up of an array of tobacco products, emphasizing the selection and consumer choice.
British American Tobacco p.l.c. (NYSE:BTI)
Number of Hedge Fund Holders: 19
British American Tobacco p.l.c. (NYSE:BTI) is a British multinational manufacturing company that specializes in tobacco, cigarettes, and other nicotine products. Investing in tobacco stocks has always benefitted income investors as these companies typically enjoy substantial profit margins, possess resilient business models, and demand minimal capital expenditures. In addition, these companies don’t have to bear excess research and development expenses, which allows them to distribute a significant portion of their earnings to investors.
British American Tobacco p.l.c. (NYSE:BTI) is mainly recognized for its iconic cigarette brands, which were acquired during its merger with RJ Reynolds in 2017. Recently, the company recorded a $31 billion write-down on the worth of its US cigarette business, indicating a probable overvaluation of the acquisition. This reflects its focus on shifting towards smoke-free products. Introducing ‘reduced risk products’ could be a winning ticket for the company given declining smoking rates in the country and strict regulations. In FY23, the company reported a 1.3% year-over-year decline in revenue at £27.28 billion ($34.49 billion).
British American Tobacco p.l.c. (NYSE:BTI)’s dividend is solid, mainly driven by its stable cash generation. In 2023, the company’s operating cash flow came in at £10.7 billion ($13.53 billion) and its free cash flow before dividend payments was over £8.3 billion ($10.49 billion). It also returned over £5 billion ($6.32 billion) to shareholders through dividends. In addition, the company’s dividend outlook appears promising as it expects to generate over £40 billion ($50.57 billion) in free cash flow before dividends over the next five years. It currently offers a quarterly dividend of $0.7431 per share, which gives its stock a yield of around 12%.
British American Tobacco p.l.c. (NYSE:BTI) has a forward P/E of 7.07, while its competitor Philip Morris International has a significantly higher forward P/E of 16.72. In addition to being more attractively valued, BTI also has a dividend yield twice as high as Philip Moris’, which makes it a good dividend option for income investors.
According to Insider Monkey’s database, there are 19 hedge funds bullish on British American Tobacco p.l.c. (NYSE:BTI) as of the end of March, down from 22 in the preceding quarter. The collective value of these stakes is over $588 million. With over 12.6 million shares, Orbis Investment Management was the company’s leading stakeholder in the first quarter.
Overall BTI ranks 7th on our list of the best FTSE dividend stocks to buy. You can visit 10 Best FTSE Dividend Stocks To Buy Now to see the other FTSE dividend stocks that are on hedge funds’ radar. While we acknowledge the potential of BTI as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BTI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Michael Burry Is Selling These Stocks and Jim Cramer is Recommending These Stocks.
Disclosure: None. This article is originally published at Insider Monkey.
