Tobacco shares like British American Tobacco (LSE:BATS) are widespread shares for traders concentrating on a big and dependable second earnings.

Their merchandise are extremely addictive, which implies they continue to be in nice demand throughout all factors of the financial cycle. This offers them with the secure revenues and money flows to constantly pay a good dividend.

Capital expenditure additionally tends to be comparatively low, reflecting the mature nature of the tobacco trade and their easy manufacturing processes. This provides cigarette makers more money to distribute amongst shareholders.

These qualities have allowed British American Tobacco to raise annual dividends for 18 of the final 20 years:

Encouragingly for traders, Metropolis analysts anticipate the FTSE 100 firm to maintain lifting dividends over the quick to medium time period. However does this make British American Tobacco shares a purchase?

8.1% dividend yield

Though rising commerce tensions threaten dividends throughout the London inventory market, predicted payouts at British American Tobacco are tipped to stay exceptionally excessive, as proven beneath.

However simply how practical are present dividend forecasts?

Firstly, it’s price noting that projected rewards aren’t considerably lined by anticipated earnings by means of to 2027. Dividend cowl of 1.5 occasions by means of the interval is nicely beneath the broadly accepted security benchmark of two occasions and above.

That mentioned, British American Tobacco’s extremely secure operations imply that earnings cowl sometimes isn’t as essential as with extra cyclical firms. So the corporate’s stability sheet could also be a greater information to the robustness of those dividend forecasts.

Sadly, the FTSE agency doesn’t rating particularly extremely on this entrance both. At 2.44 occasions on the finish of 2024, web debt to adjusted EBITDA remained on the higher finish of the corporate’s 2-2.5 occasions goal.

British American Tobacco additionally faces appreciable prices associated to a litigation case in Canada, for which it’s put aside £6.2bn, however might finish up shelling out extra. All this might compromise the agency’s capability to pay these massive dividends analysts are predicting.

Are the shares a purchase for me?

So is British American a potential purchase? I’m not satisfied, regardless of the potential dividends.

Over the past decade, the share price has dropped 11.3% in worth. Which means that, even bearing in mind dividends in that point, it’s delivered a complete return of simply 41.3%.

That’s lower than half the FTSE 100’s complete return of 85.1% over the interval. And I concern the corporate might proceed delivering index-trailing returns as regulators tighten guidelines regarding the sale and use of tobacco merchandise, threatening future earnings.

Like different tobacco producers, the enterprise is diversifying into new applied sciences like vapes to ship future earnings. And it’s making strong progress on this entrance (gross sales rose 15.6% over the course of 2024).

But merchandise like its Vype e-cigarette face the identical regulatory crackdowns as its conventional flamable merchandise. There’s additionally an enormous query markover the profitability of those new merchandise.

So even with its excessive yields, I’d fairly purchase different UK dividend shares as we speak.