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Dividends are the main attraction for investors who buy British American Tobacco (LSE:BATS) shares. Its addictive products result in robust cash flows, the lifeblood of any company’s dividend policy.
British American’s raised annual dividends consistently for decades. It’s a trend City analysts tip to continue, meaning dividend yields that comfortably beat the FTSE 100‘s 3.1% average.
YearDividend per shareDividend yield2025243.61p5.8%2026248.93p6%2027257.47p6.2%
If current projections are correct, a £20,000 investment in British American shares today will deliver total dividends of £2,730 to the end of 2027.
Yet broker forecasts are never set in stone. So how realistic are current dividend projections? And more broadly, should investors consider adding the tobacco titan to their portfolios?
Good news!
On the first question, things are looking good on the dividend front. British American remains flush with cash, illustrated by its commitment to substantial share buybacks.
Just today (9 December), the company announced plans to repurchase another £1.3bn worth of equity in 2026. Successful debt reduction is also reinforcing these plans — British American expects leverage to drop to 2 to 2.5 times by the end of next year.
On the downside, dividend cover isn’t nearly as robust as the balance sheet. And this creates some risk.
Expected payouts are covered between 1.4 and 1.5 times by anticipated earnings through to the end of 2027. Readings are far below the accepted security benchmark of two times. And they leave little room for error if profits are blown off course.
Is this a dealbreaker for tobacco stocks like this,though? I think not. Once again, the addictive nature of nicotine products means earnings are unlikely to be blown far off course from what brokers are expecting.
Indeed, weak dividend cover has long been a feature of this dependable dividend grower.
So what’s wrong?
The prospect of more juicy dividends is certainly appealing. But there’s a lot more to British American’s investment case than just passive income.
And as cigarette usage steadily declines, I’m mindful that its share price could steadily crumble. Today the firm repeated predictions of a 2% global tobacco market contraction in 2025.
Brands such as Lucky Strike and Dunhill are helping to keep the wolf from the door at the moment. Accelerating demand for its non-combustible products (like its Vuse vapes) is also boosting the top line. The company saw a 2% rise in group sales in 2025.
But it’s a matter of time before worries over the sales outlook emerge, in my opinion. The world continues to move towards a smokeless world, and new categories are under increased scrutiny from regulators as well. There’s also a massive problem of industry counterfeiting, especially in the US.
Is British American a Buy?
I don’t think these risks are baked into British American’s sky-high valuation. At £41.75, the company trades on a trailing price-to-earnings (P/E) ratio of 31 times.
That’s substantially above the five-year average of 13.5 times, and reflects the company’s 42% share price rise this year.
I won’t be buying British American shares myself. But it may be worth considering for investors who are more confident in the broader tobacco market.
