KUALA LUMPUR (Nov 1): British American Tobacco (M) Bhd's dividend yield is getting appealing at above 6%. However, the tobacco manufacturer's share price drifted lower in the morning trading session, down 42 sen or 2.2% to RM18.40.

The attractive yield is not the result of an increase in dividend payment but the continued downtrend on share price.

In fact, BAT slashed its dividend payment to 29 sen for the third quarter ended Sept 30 (3QFY19) compared with 40 sen in the previous corresponding quarter. For the nine-month period ended Sept 30 (9MFY19), the company's dividend declared was also substantially lower at 85 sen against RM1.08 a year ago.

The investing fraternity sees it as evidence of the likelihood of lower dividend moving forward.

Affin Hwang Capital said the dividend yield of more than 6% does not present enough appeal due to the elevated earnings uncertainty.

It cut its earnings forecasts by 10% to 18% for FY19 to FY21 in view of the big drop in 3Q profit 20191E earnings per share (EPS) by 10% to 18%, reflecting its less optimistic stance on volume sales recovery in view of the unyielding illicit cigarettes and vape situation, while banking on cost cutting to prop up profits going forward.

"Post-revision, we downgrade BAT to a HOLD (from Buy) with a lower dividend discount model derived target price of RM19.20 (from RM27.80). Yields of c.6% do not present enough appeal due to the elevated earnings uncertainty, in our view," said Affin Hwang Capital.

Meanwhile, CGS-CIMB Research stated that there is a risk that its FY19F dividend per share may be lower than the house's expectation of RM1.14 as it will undertake a manpower rationalisation exercise beginning 4Q19F.

CGS-CIMB noted that BAT still has to contend with the illicit cigarette trade, which grew its share by 4% to a record-high of 65% in 3Q19.

"The market's expectation for a cigarette volume recovery was crushed by the influx of cheaper and unregulated vapouriser products, which BAT estimated to have jumped by 80% y-o-y in 9M19," it said.

MIDF Research, however, is upbeat on the tobacco stock, although it concurs with the view that business environment will continue to remain challenging for BAT in the near term. It has upgraded BAT to "Buy" but with a lower target price (TP) of RM25.90.

"Nonetheless, we are comforted by the group's rationalisation effort and continuous investment to develop new product categories such as 'Glo'.

"We also anticipate that the government consideration on regulating the vaping industry will bode well to the legal tobacco players," said MIDF Research.

In view of the share price weakness, MIDF Research believes the risk-reward profile has become attractive as the stock offers an attractive dividend yield of +6.4%. "All factors considered, we upgrade our recommendation to 'buy' on the stock," it added.