British American Tobacco: Buy, Sell, or Hold?

It's not often that you see a 9% dividend yield. If that kind of cash income was sustainable, it would be an income investor's dream. Yet that's exactly what shares of British American Tobacco (NYSE: BTI) seem to offer. Even after a brief run-up, shares still deliver a dividend yield of around 9%.

Is it time to buy this dividend superstar?

Is the 9% dividend for real?

British American Tobacco sells cigarettes in 180 countries with brands including Dunhill, Kent, Lucky Strike, Pall Mall, and Rothmans. But in recent years, it has increasingly focused on smokeless products such as vapes and nicotine pouches. The goal is to achieve half of its revenue from smokeless products by 2035.

Global tobacco use has been on the decline for over two decades. And while that's a problem for British American Tobacco's core business, traditional nicotine combustibles like cigarettes remain a large and profitable business. Price hikes, meanwhile, have allowed total revenue from combustibles to remain stable, producing huge and reliable cash flow.

Over the past 10 years, for example, cash flow from operations increased by 118%. U.S. competitor Altria Group has also benefited from the same tailwinds but grew cash from operations by just 99% over the same time frame.

BTI cash from operations (annual); data by YCharts.

On the surface, British American Tobacco should have no problem maintaining its 9% dividend. While there has been some variation, the company has consistently paid a sizable dividend for more than a decade. It was just raised in March. And the company recently accelerated its share repurchase plan.

While its balance sheet isn't as strong as some competitors, the company has also begun to deleverage itself in recent quarters. Last year, just 60% of its free cash flow went toward supporting the dividend. If it needs to, management could always slow share repurchases and deleveraging to maintain its current dividend rate.

The 2 types of investors who should buy this stock

Just because British American Tobacco's 9% dividend yield is sustainable in the short term doesn't necessarily make the stock a buy for everyone. The biggest issue plaguing the company is the decline of its core tobacco market.

But that's where smokeless products like nicotine vapes and pouches come in. Nicotine use in general is actually still on the rise, with demand increasing by around 1% per year. All the company needs to do is figure out how to replace its legacy business with new smokeless products.

So far, British American Tobacco has had early success in this transition. In just four years, it has gone from having smokeless products in just three markets to more than 20 markets. These products currently generate 16.5% of total sales. And last year, its smokeless division turned a profit for the first time.

To be sure, it's still the early days for smokeless products. It's unclear whether British American Tobacco will dominate this category in the same way it dominated combustibles. And even if it is a winner, it's also not clear whether the economics will be as attractive. But for now, there's a lot to love about the company's free cash flow, and it seems to be doing everything necessary to succeed in a smokeless future.

There are two types of investors who should consider the stock. The first are retirees looking for maximum income. The second are investors who worry about a market downturn yet want to remain invested in low volatility companies. Given the stickiness of nicotine revenue, tobacco companies like this are typically safe havens during market crashes.

Just keep in mind that the tobacco industry is undergoing a slow but seismic shift from combustibles to smokeless products. Long-term shareholders must have faith that British American Tobacco can not only survive the transition but also thrive to support its sizable dividend and debt payments.

Ryan Vanzo 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 .