What an excellent 12 months it has been for shareholders in British American Tobacco (LSE: BATS). For starters, the 7.6%-yielder raised its dividend per share, because it has yearly this century. On prime of that, the share price has soared 31% over the previous 12 months. I’ve been searching for dividend shares to purchase for my portfolio – might this be one for my purchasing listing?

Sensible dividend file, however with an unsure future

Let’s begin with the dividend. British American is likely one of the nation’s finest payers, doling out over £5bn in dividends to shareholders final 12 months alone. With the FTSE 100 at the moment yielding a median 3.5%, British American gives comfortably greater than double that.

Keep in mind that this isn’t even uncommon for the share. A 12 months in the past, the decrease share price meant that the share really provided the next yield.

So what’s behind the excessive yield? I reckon there are 4 key elements.

One is the engaging economics of the tobacco trade. Cigarettes are low cost to make and may be offered at excessive costs, one thing helped by British American’s portfolio of premium manufacturers. That’s good for money technology — and dividends.

The opposite three elements are linked, as I see it. One is that many traders shun tobacco corporations on moral grounds, serving to maintain share costs considerably in examine and preserve yields. Additionally, British American has persistently grown its dividend and made it clear that that may be a precedence for the longer term too.

However that’s not assured, because of the remaining issue I feel has helped maintain the dividend excessive: uncertainty.

British American’s merchandise are killing a few of its clients. Fewer persons are selecting to smoke in most markets. There’s a threat that, if cigarette gross sales maintain falling, the dividend should be reduce in some unspecified time in the future. Rival Imperial Manufacturers made that transfer 5 years in the past.

The share seems to be low cost – maybe!

British American has been creating its non-cigarette enterprise extra aggressively than Imperial. For now the profitability mannequin doesn’t compel me. Over time although, that will enhance.

In the meantime, the corporate’s sale of cigarettes continues to fall – however stays substantial. Final 12 months, the agency noticed cigarette volumes fall by 9%, nevertheless it nonetheless shifted over half a trillion cigarettes.

The long-term economics listed below are shifting although. Larger costs will help mitigate a few of that quantity loss however there are limits to that method earlier than much more people who smoke stop.

British American trades on a price-to-earnings (P/E) ratio of 9, which seems to be low cost. However internet revenue final 12 months was lower than half what it had been three years earlier than. Whereas the present P/E ratio is reasonable, if earnings maintain sliding at tempo, the potential P/E ratio could also be a lot increased.

On the proper price, British American is likely one of the shares I’d select to purchase for my portfolio. After the previous 12 months’s share price development although, it isn’t as engaging to me because it as soon as was.

For now, regardless of that tempting dividend yield, I cannot be including it again into my portfolio. I simply reckon there are too many different higher discount dividend shares within the UK inventory marketplace for me to purchase proper now!