Is British American Tobacco a Buy, Sell, or Hold in 2025?

If you're a dividend investor, you've likely considered buying British American Tobacco (NYSE: BTI), if you don't own it already.

As a dividend stock, the tobacco giant looks about ideal. British American Tobacco offers an appealing dividend yield of 7.9%, and it has the safety of a recession-proof business, as tobacco sales are generally unaffected by the broader conditions in the economy. That makes British American Tobacco a lot more reliable for dividend income than other high-yield stocks like, say, a mortgage REIT.

However, the stock's performance has been less reliable. While British American Tobacco is up this year, it's been flat over the last five years.

So what will the new year bring for the high-yield tobacco stock? Let's take a closer look at the buy, sell, and hold arguments for 2025.

Image source: Getty Images.

Buy British American Tobacco?

Perhaps the best reason to buy the stock is its dividend. British American Tobacco is unlikely to deliver strong growth stock that drives its share significantly price higher.

However, the company does offer a well-funded dividend that currently pays nearly 8%. Additionally, the company has steadily raised its dividend over its history, though its recent hikes have been modest.

Another reason to buy the stock is that the pivot to next-gen products in tobacco is picking up steam, though Philip Morris is leading that charge with its products like Zyn nicotine pouches and IQOS heat-not-burn tobacco sticks. British American Tobacco hasn't been as successful as its top rival, but Philip Morris's growth is still an indication of the opportunity in front of BAT.

The company has struggled with illegal competition in the U.S. in the vapor market, as its vapor units sold actually fell 9% in the first half of the year. Heated products like Glo, its competitor to IQOS, have also struggled, with organic volume down 1% in the first half of the year.

On the other hand, oral nicotine pouches have been a bright spot for BAT, driven by Velo, as the category saw organic unit volume growth of 52.4% in the first half, though it's still the smallest of its three new categories.

Sell British American Tobacco?

About a year ago, BAT took a massive write-down on its U.S. cigarette business, including brands like Camel and Newport that it acquired in its merger with RJ Reynolds.

The impairment charge was roughly $32 billion and shows that headwinds from the core cigarette business are likely to weigh on the company's overall growth, even if it finds success in new categories.

The decline of smoking has been slower in international markets than in the U.S., but health concerns and regulatory restrictions are likely to continue to push smoking rates lower around the world, leaving BAT with little recourse other than to raise prices on cigarettes. As long as growth in the overall business is only modest, the stock is going to be unable to deliver meaningful gains.

Hold British American Tobacco?

Investors should expect modest growth from BAT, but the good news is that's priced into the stock, as it currently trades at a price-to-earnings ratio of 8, meaning its valuation reflects the lack of growth.

That valuation should also help put a floor on the stock, as the business model is capable of producing reliable profits, just not growth, which makes it a stock worth holding for an income investor.

What's the right choice?

Of the three, I think holding British American Tobacco makes the most sense here. Its upside potential seems limited, but if you're looking for a high-yield stock, this looks like a great one to buy, as its earnings are reliable, and the business is recession-proof.

There's also the possibility that its new products will catch on, which could drive a surge in the stock, much like the one that Philip Morris has experienced this year. That provides some upside potential for a stock that otherwise has low growth expectations.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends British American Tobacco P.l.c. and Philip Morris International 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.