£10,000 invested within the FTSE 100’s British American Tobacco (LSE: BATS) a 12 months in the past could be price far more right now.

That quantity would have purchased an investor 423 shares within the agency on the 23 April 2024 opening price of £23.60. At right now’s opening price of £31.99, these are valued at £13,531 – a revenue of £3,531 on the share price alone.

Nevertheless, the inventory has additionally been probably the most dependable dividend payers within the top-tier index for a number of years.

From 23 April 2024 to right now, it has handed a further 236p per share to stockholders in dividends. This implies these 423 shares would have made one other £998 in these payouts.

This provides a complete revenue over the 12 months of £4,529 on a £10,000 holding – a return of over 45%.

By comparability, the FTSE 100’s whole return (benchmark price efficiency plus common yield) over the identical interval was simply 3.53%.

As a long-time holder of the inventory, I’m a contented chap. I might be even happier if I assumed these types of returns might be sustained this 12 months.

So I took a better look to seek out out.

The important thing driver of share price and dividends

The principal driver of an organization’s share price and dividends over time is earnings development.

A danger to British American Tobacco is the cut-throat competitors in its enterprise sector. One other is that its ongoing strategic shift from flamable to smoke-free merchandise falters for some cause.

Nevertheless, in 2024 it added 3.6m to a complete of 29.1m to smoke-free merchandise, which now account for 17.5% of its income. And its goal stays to be a predominantly smokeless enterprise by 2035.

An sudden enhance to earnings would possibly come from Washington’s more and more arduous line on Chinese language imports. US companies have elevated their lobbying for a clampdown on unauthorised Chinese language-made e-cigarettes and vapes bought within the nation.

American tobacco companies estimate that these account for round 70% of virtually $13bn of US vape gross sales yearly. March noticed three US Congressmen help such a crackdown in a letter despatched to the federal government.

Nevertheless, even with none such enhance, analysts forecast that British American Tobacco’s earnings will enhance 16% a 12 months to end-2027.

Is the share price undervalued?

In my expertise as a former senior funding financial institution dealer, asset costs are inclined to converge with their truthful worth over time.

In British American Tobacco’s case, there may be loads of room for continued share price positive aspects based mostly on this.

A reduced money circulation analysis reveals the inventory is 52% undervalued at its present £31.99 price. Subsequently, the truthful worth for the shares is £66.65, though market vagaries might push them decrease or increased.

What’s the dividend yield outlook?

In 2024, British American Tobacco paid a dividend of 235.52p, giving a present yield of seven.4%. Consensus analysts’ forecasts are that the payouts will enhance to the tip of 2027 at minimal.

Extra particularly, the projections are for funds of 245.4p in 2025, 252.8p in 2026, and 264p in 2027. Primarily based on the present share price, this may generate respective dividend yields of seven.7%, 7.9%, and eight.3%.

Subsequently, given its robust earnings development prospects, excessive undervaluation, and excessive yield I’ll purchase extra of the inventory very quickly.