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Why I’m planning to buy more of this 7%-yielding FTSE 100 dividend stock

Rupert Hargreaves
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Recent market declines have thrown up some fantastic bargains in the FTSE 100. This could be an opportunity that’s too good to pass up for long-term investors. With that in mind, here’s one 7%-yielding FTSE 100 dividend stock that’s recently fallen out of favour with the market. However, it looks appealing as an income investment from a long-term perspective.

Income and growth

British American Tobacco (LSE: BATS) is one of the FTSE 100’s top income stocks. Ethical considerations aside, this company has one of the best dividend growth track records of all FTSE 100 companies. It has also achieved one of the most reliable earnings growth records of any large-cap stock over the past six years.

Net profit has increased at a compound annual rate of 9% for the past six years. Meanwhile, British American has hiked its dividend at an annual rate of nearly 7% per annum.

Recent trading updates from the business suggest that this trend will continue. For the year ended 31 December 2019, the company reported a 6.2% increase in adjusted revenue at current exchange rates. Adjusted profit increased by 7.6% and adjusted earnings per share jumped 9.1%.

Meanwhile, the group’s strong cash flows allowed it to reduce net debt by 4%. Rising revenues, coupled with fatter profit margins, helped the company delivered this performance.

These are all extremely positive developments. Analysts have expressed concern about British American’s high level of borrowings in the past, but this release seems to suggest that management has as the company’s debt pile under control. What’s more, the business was able to pay off around £2bn of debt, even after returning £4.5bn to shareholders via dividends.

Following this performance, management has decided to increase the firm’s full-year dividend by 3.6%.

Growth initiatives

The company’s 2019 results also show British American’s growth initiatives are yielding results. Revenue from so-called “new categories“, which includes tobacco heating and vapour products, such as e-cigarettes as well as “modern oral” tobacco products, increased nearly 37% year-on-year to £1.2bn at current exchange rates.

Management is confident this trend can continue. It’s forecasting £5bn of revenues from these new growth initiatives by the end of the decade.

Cash is king

British American’s impressive cash flow metrics suggest the dividend is exceptionally safe for the time being. At the time of writing, the stock supports a dividend yield of 6.5% for 2019. It’s also set to increase to nearly 7% over the next 12 months.

Further, after recent declines, shares in the company are dealing at a price-to-earnings ratio of just 9.6, which suggests the stock offers a wide margin of safety at current levels. Indeed, considering British American’s strong cash generation, the track record of growth and future potential, this seems to undervalue the business substantially.

As such, now could be a great time to snap up shares in this undervalued income champion. Its long-run potential is highly attractive, and the market-beating dividend yield means investors will be paid to wait for market sentiment to improve. 

The post Why I’m planning to buy more of this 7%-yielding FTSE 100 dividend stock appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020

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