British American Tobacco: The Reliable Supplier
“There are fewer and fewer smokers—we are dying out!” This joke from smoking enthusiasts contains a lot of truth. Globally, the number of smokers is falling rapidly. Even in countries with a long tradition of smoking, such as Greece, Turkey, or parts of East and South Asia, the number of smokers is declining sharply. In Germany, the younger generation is becoming increasingly abstinent—not just when it comes to beer, but also when it comes to cigarettes. The health trend and extensive education in schools have likely played a major role here.
Nevertheless, major tobacco companies like British American Tobacco (BAT) are doing quite well. The London-based company owns established brands such as Lucky Strike, Dunhill, and Rothmans. The fact that BAT continues to generate high profits despite declining sales figures is not a contradiction. This is because the cigarette market has certain characteristics that do not apply everywhere. For one thing, companies have extremely strong pricing power. A rule of thumb in the industry is that when sales volume drops, prices are raised. Added to this are enormously high margins and very low investment requirements for the companies. Gross margins for tobacco products often range around 80%. Furthermore, there is hardly any need for investment. The factories are already in place. And last but not least, advertising is virtually nonexistent because it is banned in many countries. Consequently, marketing costs are also minimal.
That said, BAT and its competitors are also focusing on smoke-free alternatives. BAT, for example, is pinning its hopes on e-cigarettes (Vuse) and nicotine pouches (Velo). Smoke-free products now account for about 20% of the company’s revenue. Since many investors and ESG funds avoid tobacco stocks, BAT, like its competitors, is often valued relatively low on the stock market. For dividend investors, however, this presents an opportunity. The current dividend yield stands at more than 5%. BAT typically pays out around 65% to 75% of its adjusted earnings per share. In addition, the company is currently implementing a multi-billion-dollar share buyback program.
RE Royalties: 10% Dividend Yield and Takeover Potential
High dividend yields are in demand on the stock market. However, investors are looking for companies with solid business fundamentals. RE Royalties is one such company. The Canadian company currently pays out CAD 0.04 per share per year. At the current share price, this corresponds to a yield of more than 10%.
This is backed by a solid business model. In this case, the royalty principle from the oil and mining sectors was applied to the renewable energy sector a decade ago. RE Royalties has since invested over CAD 80 million in more than 130 individual projects, generating a 19% return on capital employed. The company invests in solar and wind farms, battery storage, renewable natural gas, and hydropower, as well as infrastructure projects designed to increase energy efficiency. It advances capital in order to receive a long-term share of the revenue.
A typical example is the recently extended partnership with Solaris. The two companies have signed a non-binding letter of intent (LOI) for up to USD 67.5 million. Of this amount, USD 4.8 million has already been disbursed. USD 13.7 million has already been earmarked for 13 contractually bound solar projects. The remaining USD 49 million is being set aside for 83 additional solar projects in the development phase. RE Royalties provides the capital here and receives a share of future revenues. In addition, the company is also active in the short term as a provider of bridge financing. The company recently reported the full repayment of a CAD 2.4 million loan by Revolve Renewable Power Corp. Importantly, the royalties on these projects will remain unchanged under the existing agreements.
Management, which holds around a quarter of the company’s shares, had already launched a strategic review with advisors from PricewaterhouseCoopers. The company’s high dividend yield is also a reflection of its low valuation. As such, options such as strategic partnerships, co-investments, or optimizing the capital structure through equity or debt are to be explored. A sale of the entire company has not been ruled out either. Whatever the outcome of this process, the company offers an attractive dividend yield and, in the event of a takeover, potentially a premium to the current share price.
Mercedes: High Dividends, No Share Price Gain
There is currently a lot of discussion in the mass media about the Stuttgart-based automaker. Mercedes is under pressure, yet the group is in better shape than many media outlets are currently suggesting. In the second quarter, consolidated EBIT was driven by strong results from Mercedes-Benz Financial Services and Mercedes-Benz Vans. Even though things are not yet perfect in the passenger vehicle division, adjusted consolidated EBIT reached EUR 2.3 billion, exceeding the same quarter last year (EUR 2.0 billion).
The focus is primarily on efficiency measures. For example, the “Next Level Performance” program delivered further cost savings. According to the company, general and administrative expenses at the Group level fell by 14%, while research and development expenditures declined by 12% following the investment peak of the previous year. At Mercedes-Benz Cars, cost of revenue fell by 7%.
CEO Ola Källenius highlighted the company’s current successes. Sales of electric passenger cars rose by 51%. BEV order intake in Europe more than doubled in the second quarter. Mercedes plans to capitalize on this momentum with new models in the second half of the year. Nevertheless, things are far from rosy. Investors are demanding, and the passenger car division’s return on sales (adjusted) stood at 4%. Shareholders are accustomed to much higher figures from earlier times. Business in China also remains problematic. Sales figures there fell by 30%. In the world’s largest passenger vehicle market, internal combustion engines are out.
Mercedes shares rose following the announcement of Q2 results but remain clearly down year-to-date. In May, a dividend of EUR 4.30 per share was paid for the previous year; the market consensus for 2026 is EUR 3.50 per share. At the current price level, this corresponds to a yield of more than 7%.
With Mercedes, investors can bet on a high-quality German stock that appears to be gradually getting back on track. RE Royalties offers an extremely high dividend yield and a solid business model. A potential sale of the company could also be worthwhile for investors. The tobacco stock BAT is not for everyone, but its high dividend yield might be.
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