FTSE 100 dividend stock British American Tobacco (LSE: BATS) is one of my favourite income investments to buy today. I already own shares in the company and would not hesitate to buy more for my portfolio.
At the time of writing, the stock supports a dividend yield of just under 8%. This payout is supported by the group’s highly cash generative operations.
One of the main reasons some investors might want to avoid this business is its exposure to the tobacco sector. As well as the ethical considerations of investing in tobacco companies, there are also practical reasons for avoiding the sector.
The outlook for cigarette sales is almost impossible to predict. Cigarette sales are declining, and countries around the world are becoming ever more aggressive in clamping down on smoking. This means it is challenging to understand how the company will grow over the next five or 10 years.
However, British American is changing for the better, which is one of the many reasons I am interested in buying the stock.
Change for the better
The corporation has been investing heavily in its so-called reduced-risk products in the past couple of years. These are mainly e-cigarettes and other similar products, far removed from traditional cigarettes.
The company’s revenue from these products is expanding rapidly. According to the group’s latest trading update, the number of customers using reduced-risk and non-combustible products for the year to the end of September was 17.1m.
As a result of this growth, the category is now making a significant contribution to overall group revenue. The company expects overall revenue to increase by more than 5% in 2021. In comparison, global tobacco industry volume is expected to be “broadly flat“.
Overall, the company wants to expand these new categories to £5bn of revenue by 2025. That is around 20% of total group revenue.
Unfortunately, the expansion of this business will not offset declining volumes elsewhere. So, British American will remain exposed to the risks of operating in the tobacco sector.
Still, in my opinion, it will reduce the risk. The company may also start looking for new ways to return cash to shareholders in 2022.
FTSE 100 dividend stock
Management believes the company is on track to reduce its borrowing to the targeted level of three times earnings before interest, tax, depreciation, and amortisation (EBITDA) by the end of the year. When it hits this target, the group will be able to return more cash to investors, either with share repurchases or bigger dividends.
This is the main reason why I think the company is worth buying today. With its high levels of cash generation, the enterprise is a dividend champion, and it has scope to increase its distributions over the next year. For me, the scope for additional dividends compensates for the risks of investing in the tobacco sector.
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Rupert Hargreaves owns British American Tobacco. The Motley Fool UK has recommended British American Tobacco. 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.