British American Tobacco (BTI -0.14%) stock has lost more than half its value since 2017. That steep decline pushed the dividend yield up to more than 9%. That's a huge figure that is a function of the risk that Wall Street sees as this cigarette company attempts to deal with a very difficult business landscape.
Could that high yield present an opportunity for investors who want to achieve millionaire status by retirement?
What is going on at British American Tobacco?
From a big-picture point of view, British American Tobacco is trying to milk a cash cow business so that it can build up newer businesses to replace it. Along the way, it is pumping out cash to investors via dividends, too, so they stick around. This is a difficult balancing act, particularly when you consider that this consumer staples company's cash cow is cigarettes.
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Although cigarette buyers have historically been very loyal customers, there is a long-term trend toward lower consumption. The problem shows up pretty clearly in British American Tobacco's cigarette volume, which fell 21% between 2018 and 2023. If a company like Procter & Gamble or Kimberly-Clark had similar trends in their businesses, investors would be freaking out. And rightly so.
Indeed, extrapolating this trend into the future produces some truly frightening numbers. If British American Tobacco's volume fell another 20% over the next five years, its cigarette production would be around 445 billion compared to roughly 700 billion in 2018. This cash cow is very clearly dying and British American Tobacco is a high-risk investment that only aggressive investors should be considering.
British American Tobacco is paying investors well while it works to fix its issues
British American Tobacco isn't ignoring the problems it faces. For starters, it offsets volume declines with price hikes. That allowed it to continue rewarding investors with huge dividends. This is why the dividend yield is over 9% and looks sustainable, at least over the near term. But, eventually, raising prices won't be enough anymore.
In the meantime, British American Tobacco is working to build up its non-cigarette operations. That consists of things like vape products and tobacco pouches, among other products. These operations, as a group, make up around 12% of revenue. Only the company's profits are still being driven by its cigarette operations, so there's a long way to go before the non-cigarette business is anywhere near as important as the dying cash cow.
This is the game that investors are betting on when they buy British American Tobacco. If the company can transition its business away from cigarettes and toward other products, there could be material upside potential here. But if it can't do that quickly enough, the company's future is going to be pretty bleak and the dividend won't hold up.
Yes, if everything works out well British American Tobacco could help you reach millionaire status in retirement. But it isn't clear just yet that the future is going to play out as well as management hopes. And even if it does, this stock won't make you a millionaire on its own.
Probably not the best option for most investors
Dividend investors shouldn't get so enamored of British American Tobacco's ultra-high yield that they overlook the ultra-high risks investors are taking on when they buy it. While the company is working toward a future that's less reliant on cigarettes, it has a long way to go before it can claim success. And given the ongoing volume declines in cigarettes, management is racing against the clock. This is a high-risk/high-reward type situation that most investors will probably want to avoid until there's more progress on the transition plan.
