Finally, shares in British American Tobacco plc (LON: BATS) (LSE: BATS.L) soared past £40 this week. I’ve been waiting for this moment for quite a while, having bought shares in the tobacco company in multiple tranches. And while it is an all-time high for British American Tobacco, it is still on my ‘buy’ list for as and when I can get my hands on more cash to add to my portfolio.
Obviously, I’d rather buy British American Tobacco at £20 per share or even £10 per share. That’s where I’m perhaps a little different to most investors, since I tend to get less excited the higher share prices go, because I see less upside and more downside. But in British American Tobacco’s case, I think it could deliver excellent total returns for my portfolio even from £40 per share.
One reason for that is the company’s income potential. As regular readers will know, I love my dividends and on this front British American Tobacco does not disappoint. Although at £40 per share it yields ‘only’ 4.1% in an era where many of its index peers yields 5% or even 6% from pretty well-covered dividends, it is the rate of dividend growth that gets me excited.
For instance, British American Tobacco is due to raise dividends per share to 173.3p in 2017, which would represent an increase of 5.4% over the dividend which has been pencilled in for 2016. That might not sound like such a high rate of growth, but the key for me is that it is a reliable rate of growth.
Sure, other shares may offer double-digit growth in dividends, but I would question whether those companies can keep that rate up and whether their business models have proven to be as reliable as that of British American Tobacco over the years.
As mentioned, I’d rather buy any stock at a lower price and British American Tobacco is no different. But at £40 per share it still has an earnings yield of 5.7% and in my view that is pretty reasonable given its defensive growth prospects. I feel that number could be compressed as the level of uncertainty in the wider stock market looks set to remain relatively high, with investors potentially seeking out perceived ‘safer’ stocks.
I’m also optimistic about British American Tobacco’s long term growth prospects. As a non-smoker the appeal of tobacco is somewhat lost on me, but with e-cigarettes becoming more popular and the number of smokers across the globe likely to increase as world population rises, I feel comfortable in buying more shares in British American Tobacco at its all-time high. Hopefully I’ll find the cash to do just that in the near future.
The author owns shares in British American Tobacco at the time of writing.