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Is British American Tobacco (LSE: BATS) the best share to buy right now? There are some pretty strong arguments in its favour.
Admittedly, it’s hard to say anything is ‘the best’ as different investors have different criteria for the stocks they buy. But shares in the FTSE 100 cigarette maker have climbed 40% in the past 12 months, against a 5% rise for the index as a whole.
And the trailing yield is still a whopping 7.5%, more than double the FTSE 100 average of around 3.6%. It’s quite a combo.
FTSE 100 cash machine with global reach
Tobacco is an awkward industry though. It’s in long-term decline in developed markets, highly regulated and the product kills people.
Yet for better or worse, British American Tobacco is still a cash machine.
Last year, it sold more than half a billion cigarette ‘sticks’, plus another 13bn other tobacco products. That’s despite endless clampdowns in the West and came as demand in parts of Asia, Africa, and Latin America remains resilient.
The company continues to squeeze profit from shrinking volumes, by pushing premium brands like Dunhill, Kent, Lucky Strike and Rothmans.
At the same time, it’s investing heavily in next-generation products such as vapes, e-cigarettes, and smokeless tobacco. These now account for more than 16% of total revenue and growing.
Personally, I don’t buy tobacco stocks, but I know what I’m missing as a result.
A reliable stock offering strong value
Preliminary results on 13 February once again showed its customary resilience. Reported revenue dipped 5.2% to £25.9bn, mostly due to selling off the Russia and Belarus arms and currency fluctuations. Strip that out, and organic revenue grew a mild 1.3%.
Profit from operations rebounded sharply to £2.7bn, but was made to look better by heavy writedowns in 2023.
The board rewarded shareholders by lifting the dividend 2% to 240.24p and announcing a £900m share buyback for 2025.
Even after the recent rally, the stock trades at just 8.5 times earnings. That’s still low for a global blue-chip offering such a high dividend, covered 1.5 times by earnings. The 13 analysts tracking the stock are mostly bullish: five say Strong Buy, three call it Buy, and only one sees trouble ahead.
For income seekers, not thrill-chasers
The 10 analysts offering 12-month price targets suggest a median of 3,385p. Now that’s only about 7% above today’s 3,155p, in a sign that the fireworks may be over for now.
There’s a risk that after such a strong recent run the shares could drift. If tariff turbulence eases and investors shift their attention back to high-growth plays, interest in defensive income stocks like this one could fade.
Still, it’s hard to argue with British American Tobacco from a pure investment point of view. The combination of low valuation, strong cash flows and growing dividend is hard to beat.
This remains a shrinking industry though, and the long-term risks haven’t gone away. As the East and global South get wealthier, smoking could decline in the same way it has in the West.
As I said, it’s a bold (and questionable) claim to say any stock is the best to buy at any given moment, but this one makes a good case. My opinio is that it’s certainly the best share I’m refusing to buy myself!
