Is British American Tobacco A Dividend Stock To Buy, Sell, Or Hold? (NYSE:BTI)

My most aggressive stock purchases over the past month have been in shares of British American Tobacco Plc (NYSE:BTI), also traded as “BATS” on the London Stock Exchange. This was triggered by BTI’s dividend yield reaching a new all-time high of 8.8%, slightly above its earlier yield peaks in 2000 and during the 2020-2021 COVID-19 pandemic. This decline in price (=rise in yield) of BTI occurs this year even as its dividend growth seems as strong now as anytime so far this century, with the most recent hike in BTI’s quarterly dividend being from 54.45p/share in 2022 to 57.72p/share this year. In this article, I will explain:

1. How Seeking Alpha’s dividend grades are unfortunately wrong on BTI.
2. Why I see BTI’s business mix as even better than Amazon’s.
3. How BTI’s dividend may be tax-advantaged to non-American residents and retirees in many different countries, and.
4. Why I see BTI as not just a dividend superstar, but also an ESG superstar.

The Truth About BTI’s Dividend Growth

If you look on the Seeking Alpha page for BTI’s dividend, I currently see a C- for growth and an F for consistency, which seems driven by a decline in the quarterly dividend from over US$0.72/ADS in 2021 to under US$0.69/ADS in 2022. Of course, if you look at the link in the first paragraph of this article, you will see that the company’s dividend actually increased from 53.90p/share in 2021 to 54.45p/share in 2022, but in dollar terms this was more than offset by the decline in the British pound against the dollar (GBP:USD) in 2022. While that currency move meant a slight decline in my dividend income that year in dollar terms, I think it is more important to recognize that this company has been consistent at increasing its dividend every year in Pound terms. Longer term, I expect the weak pound to provide a tailwind to BTI’s profitability and improve the safety and growth of this dividend over time, even in dollar terms.

Although the below chart from Koyfin is a bit crowded, it’s the best one I’ve been able to find so far to illustrate:

1. The ~8.5% historic peak in BTI’s dividend yield.
2. The steady growth in BTI’s dividend over the past 20 years, with the dividend per share doubling twice so far this century, or roughly a 7% annual dividend growth rate, and
3. That BTI has maintained this dividend growth while also consistently keeping the payout ratio below 80% every year since 2004.

I had to double-check that even the below chart has an error where it shows a dip in the dividend in 2018 – that is because that is the year BTI switched from paying dividends semi-annually to quarterly, and it seems a glitch in this chart didn’t account for that.

So my first checklist confirms that BTI is a consistent dividend grower with a sustainable payout ratio, if we look at it correctly in British pound terms rather than US dollar terms. I will leave off on that currency point by referring back to my October 2022 article on gilt yields and the British pound, but I don’t think BTI dividend investors need to worry as much about currency as about BTI’s long-term business.

This next screenshot is from BTI’s 2022 Annual Report, showing the geographic mix of BTI’s revenues. As the chart shows, BTI’s revenues are well diversified globally, so over time, weakness in the Pound would have minimal, if not positive impact on BTI’s ability to raise its dividends.

How BTI is Like Amazon, But Better

Last month I analyzed Amazon, mostly breaking it down as a company that makes about 80% of its revenues from an unprofitable and slow-growing e-commerce business, versus only about 20% of its revenues from its highly profitable and fast-growing cloud computing business. I find it remarkable that the market seems to be assigning the valuation multiple deserved only by the 20% of its revenues that are fast-growing and profitable to 100% of its revenues, and argued that the sum of Amazon’s parts would likely be worth far less than where the market is valuing the whole.

Similarly, BTI’s revenues are a mix of around 85% from its older and slower growing combustibles business (traditional cigarettes), with the remaining revenues coming from relatively new and faster growing smokeless (aka “non-combustible”) businesses including:

1. Vapour Products, including Vuse.
2. Tobacco Heating Products (THPs) e.g., Glo, and
3. Modern Oral Products, like Velo.

The big difference I see between the 80% of Amazon’s revenue from e-commerce and BTI’s 85% from combustibles is that the former has long been unprofitable or barely profitable, while the latter remains very profitable. As the below chart shows, BTI’s bottom line net income has continued to grow steadily over the past 20 years, and has exceeded the total net income of Amazon in each of those 20 years except for the COVID-19 years of 2020 and 2021.

Despite BTI being more profitable and more consistently profitable than Amazon, BTI trades at a market value almost 1/20th that of Amazon’s. While I will agree that BTI’s non-combustible products may not have the same growth potential as Amazon’s cloud computing business, I would bet the difference between the two growth rates is far narrower than a factor of 20. Meanwhile, the odds are further put in my favor while I collect that 8.8% dividend yield waiting for the growth in BTI’s new products, while Amazon shareholders don’t get paid any dividend waiting for AWS’s growth.

On page 6 of BTI’s 2022 Annual Report, the company is quite clear about their growth targets and their progress towards them. First two goals listed are:

1. GBP 5 billion in new category revenue by 2025. BTI reported 2.9bio in 2022 vs 1.4bio in 2020, so they seem to be on track if they can double these revenues one more time not just in these next two years, but the next three years.
2. 50 million non-combustible users by 2030. BTI reported 22.5mio in 2022 vs 13.5mio in 2020, so a slightly slower growth rate than the above revenue target, but still looks quite likely this will be hit well ahead of 2030.

BTI reports that its Vapour products are currently available in 33 countries, and its THPs and Modern Oral Products in 28 countries, so while I expect many more regulatory hurdles to expanding this list of countries, I expect there to be many more where BTI will successfully navigate these hurdles. The tobacco industry has already been running as profitably as it has with 20lb weights around its legs for the past few decades, so growing within its existing markets and finding angles in new markets seems more a question of how and when than if for BTI’s new product lines.

BTI As ESG Superstar

I don’t think I’m allowed to write an article about a tobacco stock, especially not from Europe, without at least some mention of ESG. Taking a quick look at the holdings of some top ESG funds, it seems that most, if not all, exclude BTI simply because it is a tobacco company, even though I think a more critical look at BTI’s environmental, social, and governance practices might imply a different conclusion. I wrote about these earlier in my October 2022 article on Philip Morris, but I will repeat my three main points on the ESG of tobacco here:

1. Environmentally, tobacco is a far less damaging crop than palm oil or beef cattle, and the whole industry has far fewer negative externalities than automobiles or construction.
2. Socially, tobacco products have traditionally been more of a center of in-person social gatherings which many of the largest technology companies have tended to take us away from. We can debate how times have changed and how Gen-Z may prefer to socialize over non-alcoholic spirits than over cigars or vapes, but it would be harder to debate that tobacco must be a socially negative industry.
3. Governance-wise, tobacco companies tend to be some of the best run and most shareholder-friendly companies on the planet, at least from my point of view as a shareholder. Of course, my estimate of good governance is a pretty simple one: does the board ensure capital is well allocated to make me even more money later, rather than diverting what should be my profits to the CEO’s friends and other related parties. I attribute BTI’s long history of having to deal with adverse regulatory and legal challenges as a main reason BTI is forced to have an “anti-fragile” governance setup.

BTI Tax Advantages For Non-Americans

This article is not tax advice, but I should point out that one big advantage BTI has internationally is that the United Kingdom currently does not require companies to withhold any taxes on dividends paid to foreign investors. This is irrelevant to American investors, as we still need to pay US taxes on BTI dividends received in our taxable accounts, or defer them the same way as US dividends received in our IRA or 401K accounts. This difference is most significant to non-Americans living in jurisdictions that don’t tax dividend income, including, for example, Hong Kong, Singapore, and Non-Habitual Residents (NHRs) of Portugal. To use Hong Kong as an example, a $100 dividend paid from Philip Morris or Altria to a Hong Kong resident would be subject to a 30% withholding tax, leaving the investor with only $70 of that dividend. A $100 dividend from BTI, on the other hand, would see all $100 arrive in the account of this Hong Kong-based investor. In addition, if that Hong Kong-based investor were to pass away holding shares of a US company, those might be subject to estate taxes, while the IRS has ruled that an ADS like BTI should not be considered a US situs asset for US estate tax purposes.

How Much BTI Stock I’m Buying

Although I’m very bullish on BTI, I must admit that my current purchases are only topping up the weight of this stock to 2% in many accounts, and only as high as 4% in some of the most aggressive non-US accounts I manage. The 8%+ dividend yield plus 7%+ expected dividend growth implies a very high expected rate of return that I expect to outperform the market by a significant margin, but I am just too cautious about the risk of being wrong and seeing some unforeseen change make this stock go to zero. While I expect many people will still be smoking combustibles in 2040, and that at least one of BTI’s new product lines will likely take off and generate tens of billions of pounds of revenue on top of that by then, it is also possible that the rest of the world becomes New Zealand and every current smoker dies by 2040 without being replaced by a new one.

As I recently shared, in my early 20s I had an irresponsibly high percentage of my net worth in Altria stock (over 15% if I remember correctly), and my big regret was selling all of it too early at a mere 150% profit, not that I took so much risk on that great company. While BTI in 2023 does look similar in many ways to Altria around the year 2000, the downside of losing 5% of any account in one stock at this stage in my career would be greater than the downside of losing 50% of my net worth 23 years ago. My dream portfolio is one where I find 20-40 stocks, each as attractively priced as BTI is today, but exposed to 20-40 different risks. My current portfolio has about that many companies with about that many different risks, but almost none are as attractively priced as my latest top-up buy of BTI.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.