We recently published a list of 10 Low PE High 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 other low PE high dividend stocks to buy now.
A low price-to-earnings (P/E) ratio indicates that a stock may be undervalued relative to its earnings, presenting a potential buying opportunity for investors looking to acquire shares at a reasonable price. Stocks that combine low P/E ratios with high dividend yields tend to attract those seeking both value and steady income.
One of the reasons these investment strategies remain effective is their long history of delivering strong returns. Approaches centered on identifying undervalued stocks or prioritizing dividend-paying companies have consistently produced favorable results over time. Heartland Advisors referenced a study analyzing US stock returns from 1802 to 2002, which found that dividends and their growth contributed 5.8% to the total annualized return of 7.9% over the 200-year period. Similarly, research from the London Business School examined global returns from 1900 to 2005. The study found that across 17 countries, the average real return was approximately 5%, with an average dividend yield of 4.5% during that timeframe. These findings reinforce the appeal of long-term investment strategies focused on value and income generation.
The Russell Index’s gains this year have been largely driven by a small group of mega-cap stocks, particularly the tech-heavy “Magnificent Seven.” These companies account for over 25% of the index and were responsible for nearly 40% of its 21% total return in the first three quarters of 2024. However, in recent months, market leadership has shifted, with value-oriented stocks gaining momentum. In the third quarter, the Russell Value Index climbed 9.4%, significantly outpacing the 3.2% gain of the Russell Growth Index, as reported by BlackRock.
The report further mentioned that several factors may have influenced this shift toward value stocks. Strong job growth, declining inflation, and the Federal Reserve’s decision to begin cutting interest rates have boosted investor confidence, allowing the rally to extend beyond the largest mega-cap stocks. In addition, value-driven sectors that are sensitive to interest rates—such as financials, utilities, and real estate investment trusts (REITs)—tend to benefit from a lower rate environment.
Though value outperformed growth in the third quarter of 2024, recent market trends have overwhelmingly favored growth and technology stocks, leading to a decline in the representation of value stocks within US large-cap indexes. As of September 30, 2024, growth stocks comprised 32% of the Russell index, whereas value stocks accounted for only 8%, resulting in a notable 24% gap. This stands in contrast to the past 25 years, during which the average difference in market weight between growth and value stocks within the index was 7.4%.
This shift has inadvertently left many portfolios lacking diversification and underexposed to value stocks, potentially causing investors to miss out on gains as value stocks recover. To address this imbalance, investors may benefit from deliberately increasing their allocation to value stocks by complementing core US equity index funds with a dedicated value-focused investment strategy.
Dividend stocks have underperformed recently, largely due to the market’s strong focus on AI-related stocks. As a result, their valuations have declined in recent months. When it comes to dividend investing, high yields often create uncertainty among investors, making it challenging to determine whether these stocks are worthwhile investments. Investors often gravitate toward stocks with high dividend yields, assuming that a higher yield automatically translates to better returns. However, a study by Wellington Management challenged this assumption, revealing that while stocks with the highest dividend payouts and yields performed well over time, they did not necessarily outperform those with moderately high, yet not extreme, dividend yields. This finding suggests that excessively high yields do not always lead to the best results, emphasizing the need for a more balanced approach rather than focusing solely on yield size. Analysts generally consider dividend yields in the range of 3% to 6% to be healthy.
Our Methodology
To compile this list, we filtered for dividend stocks with a forward P/E ratio below 15 and dividend yields exceeding 5% as of February 16. From that group, we chose companies with a proven track record of consistently paying dividends to their shareholders. The ranking of these stocks is based on their forward P/E ratios, arranged from the highest to the lowest.
At Insider Monkey, we are obsessed with hedge funds. 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)
Forward P/E Ratio: 8.30
Dividend Yield as of February 16: 7.72%
British American Tobacco p.l.c. (NYSE:BTI) is a London-based manufacturing company that specializes in cigarettes, tobacco, and various other nicotine products. The company viewed 2024 as a year of investment, with performance aligning with its projections. Throughout the year, it continued its transformation, adding 3.6 million adult consumers to its smokeless product segment, bringing the total to 29.1 million. These products now contribute 17.5% of the company’s total revenue, reflecting a 1.0 percentage point increase compared to fiscal year 2023. The company reported revenue of £25.8 billion in FY24, representing a 5.2% decline from the previous year. This decrease was primarily attributed to the sale of its businesses in Russia and Belarus in September 2023, along with unfavorable currency translation effects.
British American Tobacco p.l.c. (NYSE:BTI) has surged by over 27% in the past 12 months. The company experienced accelerated performance in the second half of the year, driven by the rollout of innovations in its New Categories segment, the impact of strategic investments in US commercial initiatives, and the reversal of related wholesaler inventory movements. Looking ahead to 2025, regulatory and fiscal challenges in Bangladesh and Australia are expected to weigh on the performance of its combustibles segment. However, the company remains confident in its ability to build on its progress as it transitions from an investment phase to full-scale deployment. It remains committed to returning to its mid-term targets of 3-5% revenue growth and 4-6% adjusted profit from operations growth, on a constant currency basis, by 2026.
British American Tobacco p.l.c. (NYSE:BTI) has demonstrated strong cash generation, achieving 100% operating cash conversion over the past five years, with a conversion rate of 101% in 2024—surpassing its 90% target. During the year, it generated £7.9 billion in free cash flow before dividends, while operating cash flow exceeded £10 billion. Over the past five years, the company has returned £28 billion to shareholders through a combination of progressive dividends and a sustainable share buyback program. In 2024, it initiated £0.7 billion in share repurchases, with an additional £0.9 billion committed for 2025. The company’s quarterly dividend sits at $0.7431 per share for a dividend yield of 7.72%, as of February 16.
Overall, BTI ranks 2nd on our list of low PE high dividend stocks to buy now. While we acknowledge the potential for BTI as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. 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: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap
Disclosure: None. This article is originally published at Insider Monkey.
