British American Tobacco said it swung to a pretax loss, driven by a previously reported write-down of its U.S. cigarette brands, but backed forecasts for growth in 2024.
The FTSE 100 cigarette maker–which houses the Kent, Dunhill and Lucky Strike brands–said pretax loss for 2023 was 17.06 billion pounds ($21.54 billion) compared with a profit of GBP9.32 billion a year prior. It said the swing was largely driven by an impairment of GBP27.6 billion. Of the impairment, GBP27.3 billion relates to pressure on some of its traditional cigarette brands in the U.S., as it shifts focus to smokeless products, it said.
BAT said in early December that its performance in the U.S. had been hindered by smokers switching to cheaper, nonpremium brands and a rise in illegal disposable vapes. The brands being written down included Newport, Pall Mall, Camel and Natural American Spirit, a company spokesperson said at the time.
Adjusted profit from operations edged up to GBP12.465 billion from GBP12.41 billion in 2022. Despite the growth, it skirted under a company-provided consensus forecast of an adjusted operating profit of GBP12.595 billion.
New categories revenue rose to GBP3.35 billion from GBP2.89 billion, missing a forecast of GBP3.46 billion, according to company-provided consensus.
Revenue was GBP27.28 billion compared with GBP27.66 billion, dragged by the sale of its businesses in Russia and Belarus, foreign-exchange pressures and lower cigarette volumes, and partially offset by the increased new categories revenue. Revenue was forecast at GBP27.60 billion, according to consensus provided by the company.
BAT said global tobacco industry volume is expected to decline around 3% in 2024, and it backed prior guidance for low single digit organic revenue and adjusted operating profit growth for the year.
The company said it will invest this year to strengthen its U.S. business, accelerate innovation and enhance its capabilities, which it said would weight its performance toward the second half.
“Thereafter, we will progressively build to deliver 3-5% organic revenue, and mid-single digit adjusted organic profit from operations growth by 2026 on a constant currency basis. We are committed to continuing to reward shareholders with strong cash returns throughout this period,” Chief Executive Tadeu Marroco said.
The board declared a dividend of 235.52 pence a share, up from 230.9 pence.
British American Tobacco expects a one-off impairment of $31.5 billion this year due to pressure on some of its traditional cigarette brands in the U.S., as it shifts focus to smokeless products.
The FTSE 100 cigarette maker—which houses the Kent, Dunhill and Lucky Strike brands among its portfolio—said macroeconomic pressures on its traditional cigarette business performance in the U.S. and investments in its noncombustibles business would lead to an accounting noncash adjusting impairment charge of around GBP25 billion.
During a period of high interest rates, it might be more difficult to impress investors with dividend stocks. But the stocks can have an important advantage over the long term. The dividend payouts can increase over the years, helping to push share prices higher over time.
When considering stocks for dividend income, yield shouldn’t be the only thing you consider. If a stock’s price has tumbled because investors are worried about the company’s business prospects, the dividend yield might be very high. A double-digit yield might mean investors expect to see a cut to the dividend soon.
There are many ways to look at companies’ expected ability to maintain or raise their dividend payouts. But one can also take a simple approach to begin researching stock choices.
For investors who would rather aim for long-term growth to go along with dividend income, or take a relatively conservative approach to growth while reinvesting dividends, a screen of stocks in the S&P 500 SPX, +0.33%
produces only 10 stocks with dividend yields of 4.5% or higher with majority “buy” or equivalent ratings among analysts polled by FactSet. Here they are, sorted by dividend yield:
Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
The dividend yields for this group of 10 companies are based on current annual regular payout rates, with all paying quarterly except for Realty Income Corp. O, +1.30%,
which pays monthly.
These two oil and natural gas producers would have passed the above screen based on their most recent dividend payments and analysts’ sentiment, however, they pay a combined fixed-plus-variable dividend every quarter, with the fixed portion relatively low:
Shares of Pioneer Natural Resources Co. PXD, -0.77%
closed at $230 on April 14. Among analysts polled by FactSet, 59% rate the stock a “buy” or the equivalent, and the consensus price target is $257.42. The company pays a fixed quarterly dividend of $1.10 a share, which would make for a dividend yield of only 1.91%. However, the most recent variable quarterly dividend was $4.48 a share, for a combined quarterly dividend of $5.58, which would translate to an annualized dividend yield of 9.70%. The consensus estimate for dividends in 2025 is $4.63 — the analysts are only estimating the fixed portion of the dividend. Pioneer has held preliminary merger discussions with Exxon Corp. XOM, -1.16%,
according to a Wall Street Journal report.
Devon Energy Corp.’s DVN, -0.72%
stock closed at $55.70 on April 14. The shares are rated “buy” or the equivalent by 55% of analysts and the consensus price target is $67.66. The fixed portion of Devon’s quarterly dividend is 20 cents a share, for an annualized dividend yield of 1.44%. The variable portion of the most recent quarterly dividend was 69 cents a share. The total payout of 89 cents would make for an annual dividend yield of 6.39%. Analysts expect the fixed portion of annual dividends to total $3.61 in 2025, according to FactSet.
After a long period of underperformance when compared with the U.S. equity market, stocks in other countries are holding their own this year. One way to lower your overall risk with real diversification is to add exposure to an active international management style that doesn’t mirror a broad stock index.
One example is the $2.7 billion Columbia Overseas Value Fund COSZX, which is rated four stars out of five by Morningstar in its Foreign Large Value category. Fred Copper and Daisuke Nomoto co-manage the fund and described…
Group beat earnings and revenue estimates in the fourth quarter and announced a new $1 billion share buyback plan.
The cigarettes company reported adjusted earnings per share (EPS) of $1.18 on revenue of $6.1 billion in the final three months of the year. Analysts expected EPS of $1.17 on sales of $5.15 billion in the quarter, according to FactSet data.
Income-seeking investors are looking at an opportunity to scoop up shares of real estate investment trusts. Stocks in that asset class have become more attractive as prices have fallen and cash flow is improving.
Below is a broad screen of REITs that have high dividend yields and are also expected to generate enough excess cash in 2023 to enable increases in dividend payouts.
REIT prices may turn a corner in 2023
REITs distribute most of their income to shareholders to maintain their tax-advantaged status. But the group is cyclical, with pressure on share prices when interest rates rise, as they have this year at an unprecedented scale. A slowing growth rate for the group may have also placed a drag on the stocks.
And now, with talk that the Federal Reserve may begin to temper its cycle of interest-rate increases, we may be nearing the time when REIT prices rise in anticipation of an eventual decline in interest rates. The market always looks ahead, which means long-term investors who have been waiting on the sidelines to buy higher-yielding income-oriented investments may have to make a move soon.
During an interview on Nov 28, James Bullard, president of the Federal Reserve Bank of St. Louis and a member of the Federal Open Market Committee, discussed the central bank’s cycle of interest-rate increases meant to reduce inflation.
When asked about the potential timing of the Fed’s “terminal rate” (the peak federal funds rate for this cycle), Bullard said: “Generally speaking, I have advocated that sooner is better, that you do want to get to the right level of the policy rate for the current data and the current situation.”
Fed’s Bullard says in MarketWatch interview that markets are underpricing the chance of still-higher rates
In August we published this guide to investing in REITs for income. Since the data for that article was pulled on Aug. 24, the S&P 500 SPX, -0.29%
has declined 4% (despite a 10% rally from its 2022 closing low on Oct. 12), but the benchmark index’s real estate sector has declined 13%.
REITs can be placed broadly into two categories. Mortgage REITs lend money to commercial or residential borrowers and/or invest in mortgage-backed securities, while equity REITs own property and lease it out.
The pressure on share prices can be greater for mortgage REITs, because the mortgage-lending business slows as interest rates rise. In this article we are focusing on equity REITs.
Industry numbers
The National Association of Real Estate Investment Trusts (Nareit) reported that third-quarter funds from operations (FFO) for U.S.-listed equity REITs were up 14% from a year earlier. To put that number in context, the year-over-year growth rate of quarterly FFO has been slowing — it was 35% a year ago. And the third-quarter FFO increase compares to a 23% increase in earnings per share for the S&P 500 from a year earlier, according to FactSet.
The NAREIT report breaks out numbers for 12 categories of equity REITs, and there is great variance in the growth numbers, as you can see here.
FFO is a non-GAAP measure that is commonly used to gauge REITs’ capacity for paying dividends. It adds amortization and depreciation (noncash items) back to earnings, while excluding gains on the sale of property. Adjusted funds from operations (AFFO) goes further, netting out expected capital expenditures to maintain the quality of property investments.
The slowing FFO growth numbers point to the importance of looking at REITs individually, to see if expected cash flow is sufficient to cover dividend payments.
Screen of high-yielding equity REITs
For 2022 through Nov. 28, the S&P 500 has declined 17%, while the real estate sector has fallen 27%, excluding dividends.
Over the very long term, through interest-rate cycles and the liquidity-driven bull market that ended this year, equity REITs have fared well, with an average annual return of 9.3% for 20 years, compared to an average return of 9.6% for the S&P 500, both with dividends reinvested, according to FactSet.
This performance might surprise some investors, when considering the REITs’ income focus and the S&P 500’s heavy weighting for rapidly growing technology companies.
For a broad screen of equity REITs, we began with the Russell 3000 Index RUA, -0.04%,
which represents 98% of U.S. companies by market capitalization.
We then narrowed the list to 119 equity REITs that are followed by at least five analysts covered by FactSet for which AFFO estimates are available.
If we divide the expected 2023 AFFO by the current share price, we have an estimated AFFO yield, which can be compared with the current dividend yield to see if there is expected “headroom” for dividend increases.
For example, if we look at Vornado Realty Trust VNO, +1.03%,
the current dividend yield is 8.56%. Based on the consensus 2023 AFFO estimate among analysts polled by FactSet, the expected AFFO yield is only 7.25%. This doesn’t mean that Vornado will cut its dividend and it doesn’t even mean the company won’t raise its payout next year. But it might make it less likely to do so.
Among the 119 equity REITs, 104 have expected 2023 AFFO headroom of at least 1.00%.
Here are the 20 equity REITs from our screen with the highest current dividend yields that have at least 1% expected AFFO headroom:
Click on the tickers for more about each company. You should read Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.
The list includes each REIT’s main property investment type. However, many REITs are highly diversified. The simplified categories on the table may not cover all of their investment properties.
Knowing what a REIT invests in is part of the research you should do on your own before buying any individual stock. For arbitrary examples, some investors may wish to steer clear of exposure to certain areas of retail or hotels, or they may favor health-care properties.
Largest REITs
Several of the REITs that passed the screen have relatively small market capitalizations. You might be curious to see how the most widely held REITs fared in the screen. So here’s another list of the 20 largest U.S. REITs among the 119 that passed the first cut, sorted by market cap as of Nov. 28:
