Despite persistent regulatory uncertainty and declining cigarette usage worldwide, the tobacco industry is alive and well in 2025. People are smoking less, but many have shifted their consumption toward emerging products like oral nicotine pouches and electronic devices.
British American Tobacco (BTI -2.10%) has proven resilient to these market changes by focusing on innovation and high-growth categories. Indeed, the stock has returned an impressive 31% over the past year fueled by an improving growth outlook.
Here are three reasons why the rally can continue and British American Tobacco stock is a buy now.
1. A robust and highly profitable business
Operating in more than 150 countries, British American Tobacco (BAT) is recognized for its iconic cigarette brand portfolio including names like Dunhill, Lucky Strike, Newport, and Camel. The challenge for the company has been attempting to navigate an ongoing industry transformation as consumers increasingly turn to smokeless products seen as less-harmful replacements, which have proven to be highly popular.
Favorably, BAT is making progress toward its goal to be a predominantly smokeless business by 2035. In the first six months of 2024, 18% of its revenue was generated by its new categories portfolio, up from just 6% in 2017. The company's Vuse rechargeable vaporizer brand is the global market leader, while the glo tobacco stick brand holds the No. 2 position globally in the heated products category. BAT is also seeing traction in the modern oral segment, where its Velo brand of nicotine pouches is a major growth driver, and market leader outside the United States.
Image source: Getty Images.
In the first half of 2024, BAT posted 7.4% organic constant currency revenue growth from its new categories, which helped balance a 2.6% decline in traditional cigarettes. Adjusted earnings per share (EPS) increased by 1.3% year over year, benefiting from climbing operating margins. Based on preliminary full-year 2024 company figures, BAT expects low-single-digit organic revenue and adjusted profit growth in constant currency terms.
Looking ahead, management sees some "progressive improvement" into 2025 and stronger profitable growth in the mid-single-digit range by 2026 and beyond. These trends highlight a robust business that remains highly profitable. Investors confident in the ability of the company to execute its growth strategy and consolidate market positioning have a great reason to buy the stock now.
2. A compelling valuation
British American Tobacco's investment appeal lies primarily in its compelling valuation, with shares trading at a forward price-to-earnings (P/E) ratio of just 7 times its 2025 Wall Street consensus EPS. This earnings multiple stands significantly below its industry peers, with Altria Group trading at 10 times forward earnings and Philip Morris International at 17 times, suggesting BAT shares are undervalued.
One explanation for the discounted valuation assigned by the market could be BAT's more global profile and reliance on emerging markets as a key growth driver. This is in contrast to Altria, which generates the bulk of its revenue in the U.S., and Philip Morris International, which has been successful in the U.S. with its Zyn nicotine pouches that command a dominant market share position.
Nevertheless, I believe BAT stock is the tobacco industry bargain, particularly with its steady and profitable growth outlook. The company's diversified global footprint should be viewed as a strategic advantage, providing enhanced flexibility to adapt to evolving regulations and consumer preferences across various regions.
BTI PE Ratio (Forward) data by YCharts
3. An attractive high-yield dividend
Where British American Tobacco stock stands out is in its industry-leading 8.2% dividend yield, perhaps the best reason to buy and hold the stock. While dividend yields in this range often raise sustainability concerns, BAT's shareholder distributions are well-fortified by its significant free-cash-flow generation. The company's impressive track record of 25 consecutive years of dividend increases, coupled with management's recent comments committing to continued dividend growth makes BAT an excellent income idea.
BTI Dividend Yield data by YCharts
My final thoughts
2025 will be a big year for British American Tobacco as it builds operating and financial momentum led by its lineup of smokeless products. The company is well-positioned to deliver positive returns over the next several years and is a good option for investors within a diversified portfolio.
