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Dividends are the primary attraction for traders who purchase British American Tobacco (LSE:BATS) shares. Its addictive merchandise end in strong money flows, the lifeblood of any firm’s dividend coverage.
British American’s raised annual dividends constantly for many years. It’s a development Metropolis analysts tip to proceed, that means dividend yields that comfortably beat the FTSE 100‘s 3.1% common.
| 12 months | Dividend per share | Dividend yield |
|---|---|---|
| 2025 | 243.61p | 5.8% |
| 2026 | 248.93p | 6% |
| 2027 | 257.47p | 6.2% |
If present projections are appropriate, a £20,000 funding in British American shares at this time will ship whole dividends of £2,730 to the tip of 2027.
But dealer forecasts are by no means set in stone. So how reasonable are present dividend projections? And extra broadly, ought to traders take into account including the tobacco titan to their portfolios?
Excellent news!
On the primary query, issues are wanting good on the dividend entrance. British American stays flush with money, illustrated by its dedication to substantial share buybacks.
Simply at this time (9 December), the corporate introduced plans to repurchase one other £1.3bn price of fairness in 2026. Profitable debt discount can be reinforcing these plans — British American expects leverage to drop to 2 to 2.5 occasions by the tip of subsequent 12 months.
On the draw back, dividend cowl isn’t almost as strong because the stability sheet. And this creates some danger.
Anticipated payouts are coated between 1.4 and 1.5 occasions by anticipated earnings via to the tip of 2027. Readings are far beneath the accepted safety benchmark of two occasions. And so they go away little room for error if earnings are blown astray.
Is that this a dealbreaker for tobacco shares like this,although? I feel not. As soon as once more, the addictive nature of nicotine merchandise means earnings are unlikely to be blown far astray from what brokers expect.
Certainly, weak dividend cowl has lengthy been a function of this reliable dividend grower.
So what’s incorrect?
The prospect of extra juicy dividends is actually interesting. However there’s much more to British American’s funding case than simply passive revenue.
And as cigarette utilization steadily declines, I’m aware that its share value might steadily crumble. Right this moment the agency repeated predictions of a 2% international tobacco market contraction in 2025.
Manufacturers equivalent to Fortunate Strike and Dunhill are serving to to maintain the wolf from the door in the mean time. Accelerating demand for its non-combustible merchandise (like its Vuse vapes) can be boosting the highest line. The corporate noticed a 2% rise in group gross sales in 2025.
But it surely’s a matter of time earlier than worries over the gross sales outlook emerge, for my part. The world continues to maneuver in direction of a smokeless world, and new classes are underneath elevated scrutiny from regulators as properly. There’s additionally a large drawback of trade counterfeiting, particularly within the US.
Is British American a Purchase?
I don’t assume these dangers are baked into British American’s sky-high valuation. At £41.75, the corporate trades on a trailing price-to-earnings (P/E) ratio of 31 occasions.
That’s considerably above the five-year common of 13.5 occasions, and displays the corporate’s 42% share value rise this 12 months.
I gained’t be shopping for British American shares myself. However it might be price contemplating for traders who’re extra assured within the broader tobacco market.
