British American Tobacco: Well-Covered 8%+ Dividend Yield & Re-Rating Potential

(Preview) Company Update (BATS LN) (Buy)

Summary

• BTI is a good dividend stock, combining an 8.3% Dividend Yield, modest payout ratios, broadly stable earnings and a likely upwards re-rating.

• Payout ratios have been around 65% based on EPS and 70% based on cashflows, and EBIT growth has been mid-single-digits or above.

• Valuation is pressured by fears about Next Generation Products, but returns are strong even with low growth and no re-rating.

• Leverage will be back within target range in 2022, which will enable either buybacks or more dividends, and should help the stock re-rate up.

• At 2,599p ($36.16), the stock is expected to return 70% (20.3% annualized) by 2024 year-end, helped by P/E returning to 10x. Buy.

Introduction

We review British American Tobacco PLC (“BTI”) (often referred to as "BAT") as a dividend stock. We upgraded our rating on BTI from Neutral to Buy in March 2020. Since then BTI stock has returned nearly 40% in USD including dividends (but only 15% in GBP due to currency). However, year-to-date, BTI's share price ha…