Tobacco stocks are not for everyone. The fact that they engage in vices and sell addicted products makes some people reluctant, while others skip them and turn to them for faster businesses. British American Tobacco (NYSE:BTI) is one of the industry's most prominent players, with a global presence, and a combination of a wide variety of cigarette brands and smoke-free nicotine products.
The stock’s nearly 7% dividend yield provides short-term gains for the business, which investors can appreciate when market volatility rises.
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But can you believe that UK tobacco is a long-term holding in your portfolio? There are some risks, but the upside potential may surprise you.
It was a particularly difficult decade for British tobacco, also known as bats. The stock has been in trouble for years as the company faces two major challenges:
The early stages of the industry were transformed from cigarettes to smoke-free nicotine products.
The overpayment consequences of the 2017 merger with Reynolds American include writing $31.5 billion in non-cash on its U.S. cigarette brand by the end of 2023.
The dust is now settling.
Tobacco companies are transitioning to electronic cigarettes (VAP), heated tobacco and oral nicotine pouches, while British American Tobacco is competing. In 2024, organic currency neutral sales for new categories of products increased by 8.9%, accounting for 17.5% of total revenue. British American Tobacco is lagging behind Philip Morris International In smoke-free efforts, but ahead of Oteria Groupthis still depends entirely on Marlboro cigarettes in the United States
The amount of combustible cigarettes is falling, but the price of bats is increasing to offset the losses, a classic strategy for tobacco companies.
Continuous growth in new categories of products and stable cigarette revenues may drive moderate but stable long-term growth. Management expects annual currency neutral revenue growth of 3% to 5% starting in 2026. This won't cause flames to the world, but it's a cruel path.
The beauty of BAT is that you don’t need to grow dramatically to generate a great return on investment.
British American Tobacco dividend generated 7%. If it meets its growth target and maintains profit margins, the company could generate a total annual return of 10% to 12%, without considering dividend reinvestment. Put these dividends back directly into inventory and over time you will see some serious complexity.
Some investors question the sustainability of dividends, but I can't see the problem.
British American Tobacco generated £7.9 billion in free cash flow in 2024 and paid £5.2 billion in dividends. This is a 66% payment ratio, with a lot of money left. In addition, the company owns about a quarter of ITC, an Indian conglomerate with a market value of Rs 5.38 trillion, about US$63 billion. This is a valuable asset to BAT and gives dividends – the highest financial priority to be obtained by tobacco companies first – an additional safety net.
Right or wrong, stock prices may affect how investors view stocks. British American Tobacco has grown 43% over the past year, but has fallen 25% from a decade ago.
Fortunately, it seems that the stock's recent momentum is the beginning of a new era. British American Tobacco's price-to-earnings ratio was about 24 at the end of 2017.
After massive cancellations, British American Tobacco's revenue was less than 8 times earlier last year. Now, with the future, the market is buying. The stock's valuation has risen, but is still 10 times its 2025 earnings estimate. Investors may not expect the stock to recover to 24 times the return soon, but the current price is at least reasonable.
It should enable shareholders to enjoy the rewards based on the company's growth and dividends. This should make long-term investors very happy.
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Justin Pope has no position in any of the stocks mentioned. Motley Fool recommends British American Tobacco PLC and Philip Morris International and recommends the following options: On January 1, 2026, $40 called British Tobacco and $40 for January 40 for British Tobacco. Motley Fool has a disclosure policy.
Are British American Tobacco stocks purchased for a long time? Originally published by Motley Fool