British American Tobacco: 3 Reasons to Look Beyond the Yield Before You Buy the Stock

Core Viewpoint - British American Tobacco (BTI) is facing significant challenges despite its high dividend yield, primarily due to declining cigarette volumes and the long-term viability of its core business [1][11]. Group 1: Business Performance - Cigarettes account for approximately 80% of British American Tobacco's revenue, which raises concerns about the company's future [2]. - The company has experienced consistent declines in cigarette volumes, with a 5% drop in 2024, 5.3% in 2023, and 5.1% in 2022, indicating a non-growing business [3]. - Despite the declining volumes, British American Tobacco has been able to maintain and even increase its dividend payments, leveraging price increases to offset volume losses [6]. Group 2: Dividend Strategy - British American Tobacco is using the reliable demand for cigarettes to implement price increases, which helps sustain its high dividend yield [5][6]. - The company's strategy appears to be focused on attracting dividend investors, even as it acknowledges the challenges facing its cigarette business [6][10]. Group 3: Valuation Concerns - The high dividend yield may mislead investors into thinking the stock is undervalued, but traditional valuation metrics like price-to-sales and price-to-book ratios suggest that British American Tobacco is expensive [8][9]. - A significant one-time charge in 2023 related to the accounting for its U.S. cigarette business has further complicated the earnings trend, making it less reliable for valuation [9][10]. - The long-term outlook for British American Tobacco is troubling, as the company may struggle to replace its declining cigarette business with new ventures [11].