British American Tobacco (LSE: BATS) shares have executed very well over the previous 12 months, rising round 32%. That’s not together with the high-yield passive revenue on prime.

The mixture of share price appreciation and dividends has made this an amazing inventory to personal since I purchased it 12 months in the past.

Right here, I’ll take into account whether or not I can buy extra shares for my portfolio, and what number of I would must generate £1.5k a 12 months in dividends.

Passive revenue potential

After I purchased this FTSE 100 share, the forward-looking dividend yield was an eye-popping 9.9%. It’s presently decrease as a result of larger share price, nevertheless it nonetheless is available in at 7.7% for this 12 months and round 8% for 2026.

After all, these are simply forecasts and no payout is ready in stone. However the tobacco agency generates loads of surplus money, and I’m inspired that these potential payouts are coated round 1.5 occasions by forecast earnings.

Put one other approach, British American pays out roughly two-thirds of its earnings as dividends. Personally, I’d be very shocked if the payout was reduce within the close to time period.

Assuming the £2.52 dividend per share is met, this implies I’d must personal roughly 595 shares to purpose for £1,500 in passive revenue subsequent 12 months. I’m utilizing 2026’s forecast determine as a result of I don’t personal that many shares but, and there are different issues past yield for me to contemplate right here.

Falling volumes

The forward-looking price-to-earnings ratio is round 8.8, which implies the inventory nonetheless seems low cost. However on a price-to-sales foundation, the inventory seems extra dear at 2.7.

Both approach, many would argue {that a} low valuation is warranted. In spite of everything, the corporate nonetheless generates round 80% of its income from cigarettes manufacturers corresponding to Dunhill, Fortunate Strike, and Rothmans. And cigarette volumes fell by round 5% in 2022, 2023 and 2024. They’re projected to maintain falling too.

British American is offsetting these quantity declines with price will increase, which helps the lofty dividend yield for now. However in some unspecified time in the future its smokeless merchandise like vapes, heated tobacco and nicotine pouches should begin taking up among the slack.

The corporate’s imaginative and prescient is one the place people who smoke have migrated from cigarettes to smokeless alternate options. It goals for at the least 50% of income from these next-generation merchandise by 2035, up from 17.5% final 12 months.

Nonetheless, we don’t know whether or not they are going to show anyplace close to as worthwhile as cigarettes, particularly as they’ve a lot decrease manufacturing and distribution obstacles. This implies there’s much more competitors. 

If these smokeless merchandise don’t show to have a lot pricing energy, I think there is perhaps some backsliding on targets. We’ve seen this dynamic play out just lately with BP, which is lowering investments in renewable vitality and rising concentrate on oil and gasoline manufacturing. In different phrases, its bread and butter.

Ought to I purchase extra shares?

Upon reflection, I’m pleased with the scale of my holding on this inventory for now. If it sells off, I’ll rethink.

The subsequent quarterly fee of 60p per share is due on 7 Might. What I’ll do is reinvest that money into different dividend shares in my portfolio, in all probability Authorized & Normal or Aviva.