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FTSE 100 heavyweight British American Tobacco (LSE: BATS) dropped 9% on the 13 February release of its full-year 2024 results.
I am not bothered about such a drop in a stock I bought for its high yield. After all, a share’s yield moves in the opposite direction to its price, which would increase my return.
I would only be concerned if such a price fall indicated a fundamental problem in the company. So to ascertain if this is true, I took a closer look at the numbers and the core business.
Were the results that bad?
Revenue fell 5.2% year on year to £25.867bn because of the sale of its Russian and Belarussian businesses. I think this was a key factor in pushing the share price lower on the day of the results release. A risk here is that the firm cannot compensate for this loss through business growth elsewhere.
Another factor that weighed on the stock’s price was a £6.2bn provision for a proposed legal settlement in Canada. The lawsuits are based on alleged health damage caused by smoking. There is a risk of more such actions against tobacco firms.
And an additional risk is increased anti-smoking regulations, with the firm highlighting Bangladesh and Australia in this regard.
What’s the business outlook from here?
That said, British American Tobacco continues to shift from combustible to smoke-free products. Its objective is to be a predominantly smokeless business by 2035.
In 2024, it added 3.6m to a total of 29.1m to smoke-free products, which now account for 17.5% of its revenue.
In 2025, the firm expects revenue growth of around 1% and a 1.5-2.5% increase in adjusted operational profit.
Looking further ahead, it is committed to growth of 3-5% in revenue and 4-6% in adjusted operational profit in 2026.
What’s the yield outlook?
The firm announced an annual dividend increase in its 2024 results to 235.52p from 230.89p.
On the present share price of £30.83, this generates a yield of 7.6%. It is more than double the current average FTSE 100 of 3.5%. And it easily exceeds the minimum 7% I want in my high-yield stocks.
Even better from my perspective is that analysts forecast this will rise to 8% in 2025, 8.3% in 2026 and 8.8% in 2027.
How much dividend income can be made?
I like to build my holdings in companies in increments of £5,000. This encourages me to rigorously assess the risks in my stocks every step of the way before I build a big position.
I will add another £5,000 to my British American Tobacco stake shortly, and this should make me £380 in dividends this year.
If the yield averages the same over 10 years and I reinvest the dividends back into the stock (dividend compounding) this will rise to £5,666. And after 30 years on the same twin bases, it will increase to £43,533.
Adding in my initial £5,000 investment and my British American Tobacco holding would be worth £48,533 by then. This would be paying me a yearly dividend income of £3,689 at that point.
It underlines how relatively small investments in high-yielding stocks can generate significant passive income over time.
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