When it comes to high-yield investments, British American Tobacco (BTI) and Kraft Heinz (KHC) often appear as options for dividend-seeking investors. Both companies have their strengths and weaknesses, but one key difference sets them apart, making one a potentially better choice for long-term investors.
Dividend Yield: British American Tobacco Leads the Pack
For those prioritizing dividend income, British American Tobacco (BAT) offers a clear advantage. Currently, BAT delivers an impressive 8.4% dividend yield, significantly outperforming Kraft Heinz’s 5.5% yield. While both yields are higher than the S&P 500’s average of 1.2%, and the typical consumer staples stock yield of 2.8%, BAT’s yield stands out as a much more attractive option.
However, the comparison doesn’t end with the yield. The companies’ dividend histories further illustrate their differences. Kraft Heinz cut its quarterly dividend in 2019 from $0.625 per share to $0.40 per share, with no subsequent growth in payments. In contrast, British American Tobacco has demonstrated a consistent increase in its quarterly dividends since 2018, a positive trend that signals financial stability and investor commitment.
While BAT shines in terms of dividend yield, dividends alone don’t paint the full picture for investors looking at the broader financial health of these companies.
Business Challenges: Both Companies Face Struggles
The high dividend yields from both BAT and Kraft Heinz reflect underlying business challenges. For long-term investors, understanding these struggles is crucial.
Kraft Heinz was formed through the merger of Kraft and Heinz with the initial goal of cutting costs to boost profitability. However, this approach quickly became unsustainable, leading to a shift in strategy. The company is now focused on growing its core brands and divesting weaker ones. While this strategy has worked for competitors like Procter & Gamble and Unilever, Kraft Heinz has faced difficulty in executing it. The brands it is prioritizing have underperformed, even compared to those it’s planning to divest. As a result, the company’s stock has been sluggish, and the high dividend yield reflects investor concerns about its future.
On the other hand, British American Tobacco’s troubles are far more fundamental. The company’s core product—cigarettes—has been in decline for years. In 2018, BAT produced around 700 billion cigarettes, but by 2023, this number had dropped to 555 billion, with further declines expected in 2024. BAT has attempted to mitigate these declines by raising prices, but such strategies can only go so far before they exacerbate the issue. Additionally, the company has adjusted its accounting for U.S. cigarette brands, signaling that it expects these products to lose significant value in the coming decades. Despite this, BAT’s stock price has risen by over 15% in the past year, though the long-term outlook remains uncertain.
Which Stock is the Better Choice?
In summary, both British American Tobacco and Kraft Heinz face significant challenges. Investors looking for high yields should be cautious, as the underlying business struggles may impact long-term growth.
Between the two, Kraft Heinz appears to offer the better opportunity. While both companies are working to improve their operations, Kraft Heinz benefits from the essential nature of its products—food—while British American Tobacco is reliant on a declining industry. Given the strong portfolio of brands Kraft Heinz controls, there’s a better chance it will recover and thrive in the future, whereas BAT’s core cigarette brands could be headed for obsolescence.
Final Thoughts: Should You Invest $1,000 in British American Tobacco?
Before making an investment in British American Tobacco, consider this:
The Motley Fool’s Stock Advisor team has identified 10 stocks they believe are better picks for investors right now—and British American Tobacco is not on that list. These top picks are expected to generate substantial returns in the coming years, making them potentially more attractive options for your portfolio.
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