The FTSE 100 contains many high-yielding stocks at the moment. But not all of these stocks are worth buying.
Here, I’m going to put the spotlight on a Footsie stock with a yield of over 8% at present. Is it a good pick for income investors?
A monster yield
The stock I want to focus on today is British American Tobacco (LSE: BATS). It’s a leading tobacco company that owns a number of well-known brands including Lucky Strike, Dunhill, and Kool. A well-established, defensive FTSE 100 company, BAT is a reliable dividend payer that has been rewarding shareholders with big payouts for decades.
For 2022, it declared a total dividend of 230.9p, up 6% on the year before. That payout translates to a yield of around 8.1% at today’s share price. However, for 2023, analysts expect a payout of 245p per share. That takes the yield here to a whopping 8.6%.
Dividend coverage (the ratio of earnings to dividends) is projected to come in at around 1.6 this year. This suggests that the payout isn’t in any danger of being cut in the near term.
Worth buying?
An 8.6% dividend yield is no doubt attractive at first glance.
However, there’s more to a stock than just its yield. For example, we also need to look at things like the company’s valuation, its balance sheet, and its long-term growth prospects. Ultimately, we want to ensure that the stock isn’t at risk of a share price collapse.
Now, the valuation here is quite low at present. Currently, the shares trade on a forward-looking price-to-earnings (P/E) of just seven. I see that as an attractive valuation.
The balance sheet isn’t amazing though. At the end of 2022, BAT had adjusted net debt of £38.1bn on its books. That represented about three times its earnings before interest, tax, depreciation, and amortisation (EBITDA). This level of debt could become a bit of a problem now that interest rates are much higher.
As for growth, the outlook is a little murky, in my view. Today, governments are making life very difficult for tobacco companies by introducing new regulations designed to stop smoking. And the pressure on these companies may increase in the years ahead.
The firm is making a pivot towards less harmful products (its brands here include Vuse and Glo). But regulators are focused on these too. It’s worth noting here that analysts at JP Morgan just downgraded the stock from ‘buy’ to ‘neutral’, stating that regulatory risks are building in the company’s Vapour division.
My view
Given the uncertainty over the company’s long-term growth prospects, British American Tobacco shares aren’t a buy for me today.
The yield here is attractive, for sure. However, all things considered, I think there are safer dividend stocks in the FTSE 100 index to buy today.
This post was originally published on Motley Fool
