Stock market

1 FTSE 100 Dividend Superstar I would now buy again on Lloyds shares

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I sold mine. Lloyd’s (LSE: LLOY) recently for two main reasons.

First, it trades too much like a ‘penny share’ for my taste. Strictly speaking, it is not one because its market capitalization is huge. But at just 56p a share, every penny is worth around 2% of its value!

Second, it doesn’t yield high enough returns for me. Since I recently turned 50, I’ve focused on buying high-yielding stocks so I can live off the income.

These stocks also need to look set for growth, because that’s what drives returns over time.

And they need to be undervalued, because that makes it less likely that big share price falls will wipe out dividend gains.

I put some of the proceeds from the sale of Lloyds into it British American Tobacco (LSE: BATS) is based on this strategy.

Growth perspective

Consensus analyst forecasts are for Lloyds’ earnings to grow by 4.9% annually to the end of 2026. Earnings per share are forecast to grow 8.4% annually over the period. And return on equity is predicted to be 11.3% by the same point.

For Lloyds, one risk is reduced profit margins as UK interest rates fall. It also faces legal action over the mis-selling of car loans through its Black Horse insurance operation.

British American Tobacco, by contrast, is forecast to grow its revenue by 49.4% annually through the end of 2026. Earnings per share are expected to grow by 47.8% annually during this period. And the return on equity is predicted to be 16.4% till the same point.

For British American Tobacco, one risk is potential legal action for health problems caused by its products in the past. Another is the loss of competitive advantage due to any delay in the transition to nicotine replacement products.

But overall, in my view, this category is a clear win for the tobacco firm.

Determination of share price

Using the key price-to-earnings (P/E) measure, Lloyds currently trades at 7.8, compared to a peer group average of 7.6. So it’s a bit more visible than its peers.

British American Tobacco trades at a P/E of 6.6, compared to a peer group average of 13.2. So it looks clearly underpriced.

Another clear win for British American Tobacco I think.

Dividend yield

Lloyds pays 2.76pa a share in dividends in 2023, taking the current 56p share price to 4.9%.

British American Tobacco paid out 230.89p in the same year, giving the current £24.76 share price a 9.3% gain.

The yield difference is huge when it comes to the payouts I’ll get over time.

For example, £10,000 invested in Lloyds at an average of 4.9% would give me a capital of £43,362 after 30 years. That would pay me £2,069 a year, or £172 a month in dividends.

But an investment of £10,000 in British American Tobacco at an average of 9.3 per cent would yield three times Lloyds’ money.

Specifically, £161,068 after 30 years. That would pay me £14,251 a year, or £1,188 a month!

So, another big win for the tobacco firm here, making it three out of three.

As a result, I am very happy with my decision to switch Lloyds for British American Tobacco and would do the same again today.


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