British American: 3 Reasons I'm Buying This 8.2% Yielding Aristocrat In 2025

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I'm buying BTI aggressively in 2025 due to its 8% yield, 6% growth plan, and 36% upside return potential.BTI's dividend is potentially very safe, supported by a strong balance sheet, stable cash flow,...

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Deagreez  Bottom-Line Upfront: I'm Buying BTI With Both Hands In 2025 Dividend Kings Zen Research Terminal  2025 Consensus Return Potential: 35% vs 10% S&P 2026 Consensus Return Potential: 91% = 36% CAGR vs 8% (3% CAGR) S&P FAST Graphs, FactSet 2029 Consensus Return Potential: 160% = 21% CAGR vs 68% S&P (11% CAGR) FAST Graphs, FactSet British American Tobacco (NYSE:BTI) is a company that I've been recommending since 2019, when it went from 50% overvalued to 50% undervalued. According to TipRanks, I've recommended BTI 81 times, and despite the second-worst bear market in its history, those recommendations have averaged 8.4% stock price returns within the first year, including dividends, and a 17.4% average total return within the first year. 2024 has been one of the best years in stock market history (12th best), yet even the red-hot S&P and Nasdaq can't hold a candle to British America's 33% rally. Ycharts After years of frustration, BTI is finally getting its due, but I have great news for ultra-yield dividend aristocrat investors. There are three reasons why I'm not just pounding the table for the 82nd time on BTI; it's my favorite Ultra-Yield aristocrat that I'll be buying aggressively in 2025. Let me show you why BTI, once more a Wall Street Darling, is likely just getting started on what could be one of the best ultra-yield aristocrat returns of the next decade. The Last Time British American Was This Undervalued (2000, Value Crash + Master Settlement Panic)          Time Frame (Years) Annual Returns Total Returns S&P 500 Annual Returns S&P 500 Total Returns   1 109% 109% 56% 56%   3 45% 208% 33% 134%   5 42% 487% 28% 250%   7 40% 953% 22% 291%   10 30% 1231% 19% 487%   15 25% 2742% 18% 1122%   Click to enlarge (Source: Portfolio Visualizer Premium) Reason One: One Of The Possibly Safest 8% Yielding Companies In The World British America has always been owned for its yield, but BTI's yield has steadily fallen after peaking at 10.6% in 2023.         Rating Dividend Kings Safety Score (Over 1,000 Metric Model) Approximate Dividend Cut Risk (Average Recession) Approximate Dividend Cut Risk In Pandemic Level Recession   1 - unsafe 0% to 20% over 4% 16+%   2- below average 21% to 40% over 2% 8% to 16%   3 - average 41% to 60% 2% 4% to 8%   4 - safe 61% to 80% 1% 2% to 4%   5- very safe 81% to 100% 0.5% 1% to 2%    British American  95% 0.5% 1.25%   S&P 100% Risk Management Percentile, Exceptional BBB+-stable outlook credit rating = 5% 30-year bankruptcy risk 20% or Less Max Risk Cap   Click to enlarge That dividend was very low risk at its peak yield of nearly 11% and remains very safe today, in my opinion. That's courtesy of a highly stable, free cash flow-rich business model and excellent dividend profile.              Year Dividend EPS FCF Per Share EPS Payout Ratio FCF Payout Ratio Dividend Cost (Billions) Retained Earnings Retained Free Cash Flow   2023 $2.80 $4.73 4.74 59.2% 59.1% $6.20 $4.28 $4.30   2024 $2.97 $4.69 4.89 63.3% 60.7% $6.58 $3.81 $4.25   2025 $3.06 $4.83 5.18 63.4% 59.1% $6.78 $3.92 $4.70   2026 $3.14 $5.09 5.67 61.7% 55.4% $6.96 $4.32 $5.61   2027 $3.25 $5.34 NA 60.9% NA $7.20 $4.63 NA   2028 $3.46 $5.91 NA 58.5% NA $7.67 $5.43 NA   Total/Annualized (2023 to 2028) 4.3% 4.6% 6.2% 0.7% -2.1% $27.52 $16.69 $14.56   Click to enlarge (Source: FactSet) Rating agencies consider 85% a safe payout ratio for tobacco companies because of the stable nature of cash flows. BTI's policy is to maintain a 65% payout ratio lower than that of big tobacco giants.  Altria (MO): 80% payout ratio policy. Philip Morris (PM): 75% payout ratio policy. BTI: 65% payout ratio policy.  BTI's consensus payout ratio is expected to fall below its target goal of 55% on a free cash flow basis in 2026 and likely close at 50% by 2028. That's because management has reached profitability on its reduced-risk product or RRP portfolio two years ahead of schedule. It expects to earn $500 million in profit on RRPs in 2024 and $1.1 billion in 2025, with steady gains beyond that. But a profitable business and industry-leading payout ratios are not enough; the balance sheet also needs to be strong. FactSet  BTI's cash position is up almost $1.5 billion from a year ago, and it has over $20 billion in cash and borrowing power currently available. Its bond maturities are well-laddered, with no major bond maturity that might risk a default. Its debt is 99% unsecured for maximum financial flexibility, and the bond market, the smart money on Wall Street, is confident that BTI will be around for decades and paying its debts. FactSet  In 2015, BTI sold 40-year bonds, yielding 4%. Today, after 5% rate hikes from the Fed, those bonds yield 6.4%. In other words, 31 years from now, in 2055, after BTI has stopped selling cigarettes in many markets (the US in 2050), bond investors are confident it will still be around and generate strong free cash flow.   FactSet  The bond market, via credit default swaps and insurance policies that are traded daily, can tell us the real-time probability of a default (bankruptcy). The bond market currently estimates a 30-year bankruptcy risk of 3.22%, less than the 5% S&P estimate. The fundamental risk has been falling by 11% to 21% over the last six months, depending on the time frame. Balance Sheet Consensus Forecast              Year Total Debt (Millions) Cash Net Debt (Millions) Interest Cost (Millions) EBITDA (Millions) Operating Cash Flow (Millions) Average Interest Rate   2023 $50,195 $5,875 $44,111 $2,229 $16,712 $14,172 4.44%   2024 $47,295 $8,079 $41,666 $2,185 $16,619 $13,395 4.62%   2025 $44,720 $10,006 $39,417 $2,163 $16,875 $13,775 4.84%   2026 $42,145 $12,274 $37,071 $2,146 $17,323 $14,624 5.09%   2027 $50,651 $20,474 $32,352 $2,189 $18,249 $15,510 4.32%   2028 NA NA $28,004 NA $17,159 $14,792 NA   2029 NA NA NA NA NA NA NA   Annualized Growth (2023-2028) 0.2% 36.6% -8.7% -0.5% 0.5% 0.9% -0.7%   Click to enlarge (Source: FactSet) BTI's debt is expected to remain stable, but its growing cash flow and cash position mean rapidly falling net debt. Leverage Consensus Forecast          Year Debt/EBITDA Net Debt/EBITDA (3 Or Less Safe According To Credit Rating Agencies) Interest Coverage (8+ Safe)   2023 3.00 2.64 6.36   2024 2.85 2.51 6.13   2025 2.65 2.34 6.37   2026 2.43 2.14 6.81   2027 2.78 1.77 7.09   2028 NA 1.63 NA   Annualized Change -2.0% -9.2% 2.7%   Click to enlarge (Source: FactSet) BTI is on track to achieve an upgrade to   S&P       S&P LT Risk Management Score Rating   0% to 9% Very Poor   10% to 19% Poor   20% to 29% Suboptimal   30% to 59% Acceptable   60% to 69% Good   70% to 79% Very Good   80+% Exceptional   British American 94% Optimal    Global Percentile 100% Percentile (Top 130 companies in the world)   Click to enlarge (Source: S&P) Reason Two: A Solid Growth Plan For 6% Long-Term Growth Investor presentation  BTI management recently reiterated its 4% to 6% long-term EPS and dividend growth, with analysts expecting 6%. Investor Presentation  Cigarette volumes have been falling for over 50 years, but top-line revenue keeps growing as long as the price per pack rises faster than volume declines. BTI expects 1% revenue growth in cigarettes, with cost-cutting and buyback driving steady mid-single digit EPS and dividend growth. Investor Presentation  BTI's RRP portfolio has been growing volumes at 26% CAGR for the last three years, with 10% annual price hikes, 2X better than the 5% it was raising cigarette prices. Investor Presentation  BTI's margins on RRPs have been rapidly improving, and in 2025, gross profits on RRPs are likely to overtake cigarettes for the first time. Investor Presentation  Management has successfully generated efficiencies, including $650 million in cost-cutting last year alone. Management thinks it can cut $2.6 billion in annual costs in the next few years. Averaging $520 million per year. Investor Presentation  Philip Morris was the first mover on RRPs with IQOS in 2012 and reported gross margins slightly better than cigarettes. BTI isn't quite there yet, with cigarette gross margins of 83%, but in some markets, RRP margins are now 60%.  BTI cigarette markup is about 6X. For RRPs, it is up to 2.5X but rising rapidly.  Investor Presentation  BTI's reinvestment rate, the percentage of profit reinvested into RRP growth, has fallen to 50%, indicating that for the first time, BTI is using most of its RRP profits for dividends, debt repayment, and buybacks. Investor Presentation  BTI expects to generate $65 billion in free cash flow through 2030, averaging about $11 billion annually. $6.6 billion in annual dividend cost. Investor Presentation  Thanks to its disciplined approach to deleveraging after buying RJR Reynolds in 2017, it can safely restart its buyback program. That includes plans for almost $1 billion in buybacks in 2024 and $1.2 billion in 2025. Investor Presentation  BTI is committed to a progressive dividend, meaning the payout only goes up; it is never cut unless necessary. With a strong balance sheet that gets stronger every year, this explains the 24-year dividend growth streak that will reach 25 years in 2025. Investor Presentation  By 2030, management says it's on track for 35% of sales from RRPs, doubling non-smoking customers from 26 million to 50 million. Investor Presentation  In the US, vaping is expected to grow at 8% CAGR through 2030 and oral nicotine pouches by 20% CAGR. Investor Presentation  In the legal vaping market, Vuse has a 51% market share, though much of the market is being lost to unregulated illegal vaping products. Investor Presentation  Globally, BTI has a 40% market share in legal vaping, with industry-leading retention rates, which bodes well for its long-term plans.  EPS growth consensus is 6% CAGR. Upper end of management 4% to 6% range.  Investor Presentation  The margins on Vuse rose to 51% last year and have been climbing steadily for years. Investor Presentation  Meanwhile, Velo oral nicotine punches have been growing users at 31% CAGR, the fastest growth rate in the global nicotine market. Which is growing at 4-5% annually. Investor Presentation  Cigarettes have no future, but nicotine is a growing industry, and that's the ultimate investment thesis for BTI and has been since 2014 when it began investing in RRPs. Investor Presentation  In some European countries, BTI already generates over 70% of revenue from RRPs, which gives credibility to its long-term plans. Including zero cigarette sales in the US by 2050. Reason Three: A Wonderful Company At A Wonderful Price Dividend Kings Zen Research Terminal  BTI's fair value yield is 6.3%, based on its 5-year average yield and 10-year average PE. In other words, if BTI were to return to its historical fair value, it would yield 6.3% and grow 4% to 6% for a long-term return potential of 10.3% to 12.3%. And long-term income growth for dividend re-investors. At the current 8.1% yield, the consensus return potential is 14.1%, superior to the S&P's 12% to 13% FactSet and Morningstar consensus. BTI is trading at 9.8X EV/FCF for a free cash flow yield of 10.2%. VictoryShares In contrast, VFLO, a deep-value FCF yield ETF, offers a 7% FCF yield and a 1.29 PEGY ratio. The EV/FCF Multiple per unit of long-term expected total return.  PEGY Ratio = EV/FCF divided by (Yield + growth) = cash-adjusted FCF PEG ratio. S&P PEGY Ratio: 2.56. VFLO: 1.29. BTI: 0.69.  The PEGY ratio lets you compare any company's valuations if it generates free cash flow. It allows a single number to represent relative valuations regardless of whether you're looking at growth stocks, value stocks, or core stocks. BTI is trading at a valuation 50% lower than VFLO. VFLO: One Of The Best ETF Buys With The Market At All-Time Highs Risk Profile: Why BTI Isn't Right For Everyone Investor Presentation  BTI is making steady progress on moving to a smoke-free future, but unlike PM, where RRP sales are approaching 50%, BTI's sales are still 82% cigarettes. BTI is guiding for 50% of sales from RRPs by 2035, which puts it 10 years behind PM. That's fine as long as BTI can deliver on its plans. However, the US remains a major risk for the company. The FDA plans to eventually reduce nicotine levels to non-addictive levels for cigarettes (not RRPs) and ban menthol. According to the Wall Street Journal, the Trump administration is friendlier to tobacco companies than the Biden administration. However, it's pure speculation whether the timing of those eventual regulations is significantly delayed. With 44% of sales from the US, FDA regulations are a significant risk since BTI needs to gain market share in the US, where vaping is popular but where many non-regulated (illegal) vaping products are sold. Even if BTI achieves its long-term growth goals (and its track record is very good), that doesn't mean that 13% to 15% long-term returns will be smooth or easy to achieve. Historical Volatility Review: The Kinds Of Volatility You Will Experience In The Future Owning BTI Portfolio Visualizer  BTI's historical volatility is 34% below that of the US (beta 0.66). But take a look at the kinds of bear markets it's experienced. Portfolio Visualizer Portfolio Visualizer  BTI was already undervalued in the Pandemic. It still fell more than the market, despite its business benefiting! 2021 was the only year since the 1950s when cigarette volumes went up. Portfolio Visualizer  The current bear market, which began in mid-2017, was due to BTI trading at absurd valuations created by the TINA (there is no alternative) record low interest rates (at the time). FAST Graphs, FactSet If you buy any stock at a 50% premium and then complain about years of negative gains, that's like buying MSFT at its 2000 peak and then declaring that it's a \"bad company\" because it took you 15 years to break even. Anyone who ignored the obvious bubble in BTI (that lasted 5 years) hopefully learned a valuable and painful lesson. Worst 5 Years Since 1985             British American Vanguard 500 Index Investor   Year Inflation Return Return   2018 1.91% -49.39% -4.52%   1999 2.68% -37.92% 21.07%   2008 0.09% -29.97% -37.02%   2023 3.35% -20.08% 26.11%   1994 2.67% -11.78% 1.18%   Average 2.14% -29.83% 1.36%   Median 2.67% -29.97% 1.18%   Click to enlarge (Source: Portfolio Visualizer)  Note that 2018 was the worst year for BTI since 1985, and it was the emergence of the 50% BTI bubble. Best 5 Years Since 1985             British American Vanguard 500 Index Investor   Year Inflation Return Return   1989 4.65% 69.44% 31.36%   2000 3.39% 67.79% -9.06%   1986 1.10% 54.05% 18.06%   2003 1.88% 49.31% 28.50%   1995 2.54% 44.36% 37.45%   Average 2.71% 56.99% 21.26%   Median 2.54% 54.05% 28.50%   Click to enlarge (Source: Portfolio Visualizer) If you're worried that rising inflation will hurt BTI, its single best years were periods of relatively high and rising inflation. As you can see, BTI's best years are exceptional experiences for investors, though you can never guess which years will be the best. Worst 5% Monthly Returns Since 1985             British American Vanguard 500 Index Investor   Year Month Return Return   1987 10 -32.60% -21.73%   1999 10 -19.78% 6.33%   2018 11 -19.65% 2.03%   1998 9 -19.33% 6.41%   1999 12 -18.81% 5.98%   1985 9 -17.14% -3.14%   1998 8 -16.90% -14.47%   2023 5 -14.41% 0.42%   1996 8 -13.99% 2.10%   2018 2 -13.27% -3.69%   1985 2 -13.23% 1.38%   1989 10 -12.62% -2.34%   1993 4 -12.45% -2.42%   2020 3 -12.38% -12.37%   2008 10 -12.32% -16.79%   1996 3 -12.05% 0.98%   2020 7 -12.00% 5.63%   2018 8 -11.68% 3.25%   2019 5 -11.56% -6.36%   1994 5 -11.50% 1.63%   1994 2 -10.94% -2.71%   2000 7 -10.70% -1.50%   2014 1 -10.64% -3.47%   2002 6 -10.54% -7.13%   Average   -14.60% -2.58%   Median   -12.54% -1.92%   Click to enlarge (Source: Portfolio Visualizer) BTI can fall as much as 33% in a single month. Best 5% Monthly Returns Since 1985             British American Vanguard 500 Index Investor   Year Month Return Return   1989 7 41.10% 9.01%   2000 3 33.15% 9.75%   1989 1 23.26% 7.32%   1985 10 20.68% 4.40%   1998 10 20.25% 8.16%   2002 5 17.83% -0.75%   1992 4 17.39% 2.91%   2000 4 15.88% -3.00%   1999 1 15.71% 4.20%   2019 3 15.40% 1.94%   2024 7 15.23% 1.20%   1993 3 14.95% 2.11%   2022 1 14.86% -5.19%   1996 11 14.48% 7.56%   1985 3 13.56% 0.01%   2021 12 13.41% 4.47%   2014 2 13.33% 4.56%   2019 11 13.30% 3.62%   1989 6 13.20% -0.59%   1988 10 12.71% 2.73%   2021 3 12.63% 4.37%   2009 5 12.61% 5.62%   2003 5 12.51% 5.26%   1986 3 12.05% 5.48%   Average   17.06% 3.55%   Median   14.91% 4.29%   Click to enlarge (Source: Portfolio Visualizer) BTI can also rise 41% in a single month, and its top 5% of months are legendary, beating the S&P by about 4X. Bottom Line: I'll Be Buying BTI With Both Hands In 2025, And You Might Want To As Well British American investors have been through a lot over the years. However, if you've been patient and focused on the fundamentals, even a significant bear market hasn't stopped you from earning solid returns. My first BTI Recommendation, Jan 9th, 2019 FAST Graphs, FactSet For example, my first recommendation in early 2019 delivered 8% annual returns for investors who patiently collected and reinvested dividends. And now that BTI is one of the hottest stocks on Wall Street? The good times are likely just getting started. BTI has spent years improving its balance sheet, growing its RRP portfolio, and de-risking its business profile.  One of the lowest risk 8% yields in the world. A solid plan for achieving 6% growth in the future. Still, 22% undervalued despite the 34% 2024 rally.  It has a 36% upside return potential in 2025 alone, and if you buy today, that 8.1% yield and 6% CAGR long-term growth consensus means 14.1% long-term income growth and total return potential. It has a 36% CAGR return potential through 2026 and a 21% CAGR through 2029, a Buffett-like return potential from an 8.1% yielding dividend aristocrat bargain hiding in plain sight. Suppose you're worried about an overvalued stock market and potential volatility next year. In that case, a historically low volatility aristocrat paying 8% is one of the most reasonable and prudent investments you can make next year.  And I am not just recommending BTI for the 82nd time; I'll be buying aggressively during any correction and using new money throughout next year.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2484619296"}