British American Tobacco: Is This Ultra-High-Yield Dividend Stock a Buy in 2025?

High-yield dividend stocks present an intriguing paradox for investors. While historical data shows they can outperform the S&P 500 over multidecade periods when dividends are reinvested, many high-yielding stocks struggle to match market returns over the short term. The reason? An exceptionally high yield often serves as a warning sign, suggesting a company's best days may be behind it.

British American Tobacco (NYSE: BTI), commonly known as BAT, exemplifies this dynamic. The tobacco giant currently offers an eye-catching 8.2% dividend yield, yet its stock performance tells a more complex story. Over the prior 10 years, BAT shares have significantly underperformed both the broader market and many of its tobacco industry peers.

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This stark contrast between BAT's generous dividend and lackluster share performance raises a critical question for investors: Does the company represent an overlooked opportunity for contrarian investors, or is the high yield masking deeper problems?

Image source: Getty Images.

Below, I'll examine the key factors driving BAT's business to determine if this ultra-high-yield stock deserves a place in dividend-focused portfolios.

The business case

British American Tobacco operates as the world's second-largest tobacco company by volume, though global cigarette consumption continues to decline by approximately 5% annually. The company has responded by investing heavily in next-generation nicotine products, aiming to offset these declines.

Still, traditional cigarettes remain BAT's backbone, generating over 80% of revenue over the past few years. The company maintains a strong position in the U.S. tobacco market, where it owns several leading brands and commands roughly one-third market share.

Next-generation products

BAT's venture into alternative nicotine products has produced mixed results. The heated tobacco product Glo has achieved modest success but significantly trails Philip Morris International's dominant iQOS platform.

The modern oral category presents similar challenges, with BAT's Velo brand losing share to competitors, despite the segment's strong growth. Only in vaping has BAT found significant success in alternative categories through its Vuse brand, though the global vaping market has shown signs of maturity.

Financial health and outlook

BAT's high dividend yield appears sustainable with a payout ratio near 60%. Generally, investors don't have to worry about a reduction or suspension until the payout ratio crosses 75%.

Regarding valuation, the stock trades at under 8x forward earnings, a dramatic discount to the S&P 500's multiple above 23. That's not surprising, given the significant headwinds in the combustible tobacco market.

On the growth front, Wall Street expects low-single-digit organic revenue growth this year, driven by pricing power in traditional tobacco and gradual gains in next-generation products. BAT's recent investments in product innovation and market expansion aim to accelerate growth, but these initiatives have yet to bear real fruit.

Investment merits and risks

BAT's strengths lie in its dominant U.S. tobacco market position and strong pricing power in traditional cigarettes. The company's geographic diversity across 180 countries provides natural protection against country-specific regulations and changing consumer preferences.

However, significant challenges include BAT's weak position in heated tobacco products, compared to Philip Morris International, and stagnation in the global vaping market. Currency exposure adds another important risk factor to the mix, given the company's substantial dollar-denominated debt.

The verdict

BAT stock presents a classic value-trap dilemma. While the 8.2% yield and rock-bottom valuation might tempt income investors, the company's struggles in next-generation products and declining core business suggest the market's pessimism may be warranted.

The investment case ultimately hinges on whether BAT can leverage its strong U.S. market position and pricing power to fund a successful transition to alternative products. Given the company's mixed track record in heated tobacco and oral nicotine categories, along with significant currency risks, more compelling opportunities exist for income-focused investors, despite the attractive yield.

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George Budwell has positions in Philip Morris International. 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.