Price hikes and growth in smokeless nicotine products should drive earnings growth in the years ahead.
The financials indicate that British American Tobacco can keep growing its dividend per share in the future.
The stock market has switched gears in 2025. Growth stocks that were crushing it in 2023 and 2024 have gone south, while steady value stocks with dividend payments have outperformed the broad market indices. British American Tobacco(NYSE: BTI) is up 17% year to date in U.S. dollar terms, which shows the resiliency of cheap value stocks in times of market volatility.
Even with these gains, British American Tobacco sports a dividend that yields 7%, which is much higher than the market average. And this dividend payout can keep growing in the years to come. Here's why British American Tobacco stock should keep crushing the market in 2025 and beyond.
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British American Tobacco's consistent cash flow
Tobacco and nicotine have varying investor views. Some investors see the industry as on the way out the door, with volume declines in wealthier countries like the United States especially hurting sales. This has not affected the earnings of nicotine conglomerates like British American Tobacco due to the consistent price hikes the company has implemented on its cigarette products.
In 2024, British American Tobacco's cigarette volumes declined by 5% globally on an organic basis, which excludes its Belarus and Russian operations that were sold. However, even with this declining usage, the company's combustibles segment sported flat organic revenue when adjusted for foreign currency movements. This is why the company has maintained healthy free-cash-flow generation surpassing $10 billion since 2020. The company generated $11.9 billion in free cash flow last year and expects $67 billion in cumulative free cash flow from 2024-2030.
That is a lot of cash versus a market cap of $93 billion and can help maintain the company's dividend payout year after year.
Growing nicotine pouch demand
Even though pricing power helps grow cigarette revenue, British American Tobacco management knows this game cannot last forever. In order to evolve the business, it has invested heavily into alternative nicotine products like pouches and vaping.
Last year, these products generated around $6 billion in revenue for the company when taking its reporting currency of British Pounds and converting to U.S. dollars. Growth was only 3.6% in constant currency, driven by 50%-plus revenue growth in nicotine pouches. Pouches should continue to be a highlight for the segment through the rest of the decade, but what is happening with nicotine vaping?
British American Tobacco's Vuse brand is seeing competitive pressure from disposable vaping devices sourced from Asia. These products are actually not legal to sell in the United States but make up a huge percentage of convenience store sales. The United States government is beginning to crack down on these illicit device sales, which could help Vuse return to growth.
Overall, the smokeless segment for British American Tobacco has gone from close to zero revenue to billions of dollars a year in a decade. As the category keeps growing, it should make up for the volume declines in cigarettes and help contribute to free cash flow over the rest of this decade.
Free cash flow is the lifeblood of dividend income. Without free cash flow accumulating on the balance sheet, a company will eventually have to cut its dividend. Luckily for British American Tobacco shareholders, it is generating plenty of free cash flow right now.
So much so that it has paid down a ton of its debt and is now returning cash through share repurchases. Repurchases will reduce shares outstanding -- down 3.4% already in the last four years -- which will make it easier for the company to grow its dividend per share. With plenty of free cash flow piling up on the balance sheet every year, British American Tobacco should be able to sustainably grow its dividend per share for the foreseeable future.
At a dividend yield of 7%, British American Tobacco is still priced like a stock with a struggling business, but it just keeps generating cash flow. Buy today and get an ultra-high dividend yield and sustainable dividend growth by holding the stock for the long haul.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool recommends British American Tobacco P.l.c. and recommends the following options: long January 2026 $40 calls on British American Tobacco and short January 2026 $40 puts on British American Tobacco. The Motley Fool has a disclosure policy.
