This controversial UK stock now yields 7.6%! Time to buy?

Annual returns from UK stocks British American Tobacco (LSE: BATS) only increased by a staggering 7.6%. However, the company is famous for its cigarette brands Dunhill and Lucky Strike, considered a controversial ‘sin stock’. I bought it? Well, let’s start with how big the dividend is.

Fifth largest dividend

London-based tobacco manufacturer British American Tobacco (BAT) is the world’s largest tobacco company by sales, and its dividend policy is outstanding. The company aims to pay 65% ​​of its earnings to shareholders along with annual increases.

Currently, the yield is 7.6% which is the fifth largest annual payment in the FTSE 100 and almost twice the average of around 4%.

This means that £20,000 worth of shares in a company will return £1,520 in a year. And if I believe BAT can continue these payments in the long term, £20,000 in shares at 7.6% over 30 years will grow to over £180,000. However, I can’t ignore the huge problem with this company.

There are more smokers than ever before

One of the disadvantages of ‘sin stocks’ like tobacco companies is the incentive for individuals and governments to reduce consumption. It is used to smoking in the UK, where the percentage of adults who smoke has fallen from 40% in 1980 to just 13% in 2021.

BAT may be British but they are the second largest tobacco company in the world. its brand like Dunhill and Lucky Strike is popular worldwide, and the number of smokers worldwide is now higher than in history. Because of this, BAT has gone from strength to strength, outperforming the FTSE 100 for decades.

But looking forward? It is difficult to see anything other than a long-term loss in the use of tobacco. Some predictions have the UK becoming a smoke-free country by 2050, and I would imagine other countries will see a similar decline as time goes on. So what does BAT do about it?

Vaping products

BAT produces its own line of electronic cigarettes – also known as vape or non-combustibles. The latest figures from 2022 show 22.5m mature users and an average user growth of 30% for each of the past four years.

Despite this growth, non-combustibles still only make up 14% of the company’s total revenue. It is higher in developed countries, with a percentage of 46% in the UK and 74% in Sweden.

The main problem is that not every smoker buys a vape. The adult population that uses non-combustible products in the UK is estimated to be only 7%, which does not bode well for this stock in the long term.

My movement

Is it a purchase for me? If I’m looking for a stock that only focuses on income for the short term, then yes. But with the headwinds and uncertainty in the long run, I think there are better options out there at the moment.