I’ve never owned British American Tobacco shares. What on earth was I thinking?
Iâve been writing for The Motley Fool for 17 years or more but in all that time Iâve never once considered buying British American Tobacco (LSE: BATS) shares. Am I mad?
Iâve both read and written countless pieces praising it as one of the most reliable dividend and growth machines on the FTSE 100. Yet early on I drew a line. Tobacco was a bad thing, so I wouldnât buy cigarette makers. I never preached about it. I just didnât want to buy a company whose core business kills people.
I wouldn’t call myself an ethical investor. I hold alcohol via Diageo. I invest in weapons through BAE Systems. I even hold Ocado Group, which isnât unethical as a business, but as an investment has done disreputable things to my portfolio. Yet I snubbed cigarette makers. Everyone sets their own boundaries and that happened to be mine.
Long-term FTSE 100 compounder
Now Iâm beginning to question the cost of my high-minded stance. British American Tobacco has done quite nicely without my backing. It still sells around 500bn sticks a year and has a market cap of £95bn. The shares have done brilliantly. Around the turn of the millennium they traded around 325p. Today they’re around 4,376p, a rise of 1,247%.
That actually understates the total return because reinvesting dividends would have multiplied the gain. Thatâs the beauty of this stock. It sells an addictive product, so people keep coming back through every boom and every recession. The business throws off a mountain of cash and that has allowed the board to lift shareholder payouts every single year this century. Over the last 15 years the dividend has grown at an average annual compound rate of around 5.05%. Even Covid didnât interrupt it. Smokers may have faced an elevated health risk but they kept puffing.
While smoking is fading across the West, it remains embedded in many emerging markets, and vaping has opened up fresh avenues for growth everywhere.
Income attraction
At times the stock has yielded 8% or 9%. The trailing yield is roughly 5.4% today, which looks lower only because the share price has surged lately. The British American Tobacco share price up around 44% over one year and 70% over two.
Despite that strong run, the price-to-earnings ratio is just under 12, well below the FTSE 100 average of around 18. Yet Iâd be wary of buying today after such a strong run. RBC Capital Markets has raised doubts about whether the newer product lines will deliver hoped-for margins, claiming expectations are âseriously overblownâ. Health risks around vaping could hit demand or trigger tougher regulation. That fundamental risk has never gone away.
For others, British American Tobacco may still be worth considering today, especially for long-term dividend hunters. As for me, I think Iâll leave it. It feels too late to change my habits. The good news is that there are other FTSE 100 dividend growth shares that excite me just as much. Iâll stick with them.
The post Iâve never owned British American Tobacco shares. What on earth was I thinking? appeared first on The Motley Fool UK.
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Harvey Jones has positions in BAE Systems, Diageo Plc, and Ocado Group Plc. The Motley Fool UK has recommended BAE Systems, British American Tobacco P.l.c., and Diageo Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
