We recently compiled a list of the U.K. Dividend Champions List: 2024 Rankings by Yield. In this article, we are going to take a look at where British American Tobacco p.l.c. (NYSE:BTI) stands against the other U.K. dividend champions.
In recent years, investors have shown a preference for global stocks, particularly high-growth options like US technology companies, over UK equities. Over the past decade, the British index has achieved a 6% annual total return compared to 13% for the US broader market. Analysts suggest that this underperformance is partly due to weak earnings, domestic political instability, and the absence of a significant technology sector in the UK market. However, a notable factor is the sharp decline in valuations as investors have steered away from UK stocks. Goldman Sachs remarked that the challenge is not a lack of interest from foreign investors, who currently hold about two-thirds of the UK market capitalization, but rather the limited participation of domestic investors in UK equities.
That said, investing in UK stocks can still be a worthwhile choice. While the UK market lacks significant technology companies, its equities in sectors like finance, energy, and mining provide diversification opportunities that complement the tech-heavy and highly valued US markets. In addition, the UK’s index faces less risk from tariffs and trade restrictions. Goldman Sachs Research highlighted that UK equities could gain from various government measures, such as pension reforms aimed at boosting domestic investment in UK stocks and policies supporting homebuilding initiatives.
Lindsay Matcham, involved in futures sales trading at Goldman Sachs Global Banking & Markets, suggested that UK equities could appeal to investors seeking diversification. She noted that these stocks offer attractive valuations, strong dividend yields, and reduced concentration risk.
Russ Mould, investment director at AJ Bell, presented a rather interesting take on the UK market’s limited exposure to technology stocks. He pointed out that this reduced exposure has made the UK stock market less volatile compared to the US, where technology stocks are a key driver of market fluctuations. Mould observed that, despite its criticisms, the UK market experienced a relatively stable summer compared to the US, attributing this to differences in valuation and the relative expectations of the two markets.
The lower volatility in the UK market presents compelling investment opportunities, particularly given its attractive dividend yields. The FTSE 100 offers a yield of 3.68%, while the FTSE 250, representing medium-sized UK firms, provides slightly lower but still appealing income prospects. This setup allows investors to explore higher-growth sectors, such as smaller companies while benefiting from rising dividends. According to BlackRock, UK dividends are currently growing at a rate of 2-3%, aligning with long-term inflation. Stocks that consistently grow their dividends often have stable cash flows, enabling them to increase payouts over time.
Janus Henderson’s 2023 annual dividend report highlighted this upward trend, revealing that UK dividends reached approximately $86 billion in 2023, a significant rise from the $63.1 billion distributed in 2020. Given this, we will take a look at some of the best FTSE dividend stocks.
Our Methodology:
For this list, we reviewed the UK CCC Dividend list, which highlights UK companies with the longest histories of dividend growth. This list is based on the structure of David Fish’s US Dividend Champions spreadsheet and serves as a useful tool to help identify and screen dividend growth stocks in the UK. From this list, we chose 10 stocks with the highest dividend yields as of December 29 and arranged them in order from lowest to highest yield. We also measured hedge fund sentiment around each stock according to Insider Monkey’s database of 900 as of Q3 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A close-up of an array of tobacco products, emphasizing the selection and consumer choice.
British American Tobacco p.l.c. (NYSE:BTI)
Dividend Yield as of December 29: 8.25%
British American Tobacco p.l.c. (NYSE:BTI) is a London-based company that specializes in the manufacturing of cigarettes, tobacco, and various other nicotine products. The company has encountered significant difficulties lately, marked by a sharp 34% drop in its stock price from June 2022 to April 2024, underperforming the broader market. Although there are indications of recovery, the company is still lagging behind its historical growth path, mainly due to a large $31.5 billion write-down in 2023. This has led to concerns among investors about whether BTI presents a valuable investment opportunity or a potential risk, particularly as it transitions from traditional tobacco products to newer nicotine alternatives like vapes and pouches. However, the stock has surged by nearly 24% in the past 12 months.
In the first half of 2024, British American Tobacco p.l.c. (NYSE:BTI) experienced a 6.8% drop in cigarette sales compared to the same period in 2023, following similar declines of 5.3% in 2023 and 5.1% in 2022. This contributed to a significant fall in the company’s stock price, with its market capitalization dropping by over 40% at one point. However, like other companies in the industry, British American Tobacco has responded to the decline in sales by increasing prices, which has helped boost profits and led to a recovery in its stock. Due to nicotine’s addictive properties, smokers remain a loyal and steady customer base.
British American Tobacco p.l.c. (NYSE:BTI) is a strong dividend company which makes it an attractive option for income investors. The company expects to generate £40 billion (around $50.57 billion) in free cash flow, excluding dividends, over the next five years. Since 2018, it has increased its dividend annually, making BTI one of the best FTSE dividend stocks on our list. The company offers a quarterly dividend of $0.7431 per share and has a dividend yield of 8.25%, as of December 29.
The number of hedge funds tracked by Insider Monkey owning stakes in British American Tobacco p.l.c. (NYSE:BTI) grew to 24 in Q3 2024, from 21 in the previous quarter. These stakes have a total value of more than $1.3 billion. Rajiv Jain’s GQG Partners owned the largest stake in the company in Q3.
Overall BTI ranks 1st on our list of the U.K. dividend champions for 2024. While we acknowledge the potential of BTI as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than BTI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.