If I’d invested £1,000 in British American Tobacco shares 5 years ago, here’s how much I’d have today

British American Tobacco (LSE: BATS) shares can be a popular buy-and-hold investment for passive income generation. The stock currently comes with a very high 8.3% dividend yield forecast, after all.

But has British American Tobacco been a good investment over the past five years? And should I carry on holding the stock from here? Let’s take a look.

British American Tobacco shares have fallen

For all the benefits of holding the company as an income stock, the return has been pretty terrible. Over the last five years, the stock has fallen by a huge 38.6%. Therefore, my £1,000 investment would be worth a much smaller £614 today.

I can look at a total return calculation, too. This means I include the dividends I would have received over this time, assuming I reinvested them back into buying more shares. But my total return would still have been a 15.3% loss. Not quite as bad, but still not great. This would have turned my £1,000 into £847.

What’s gone wrong?

British American Tobacco has been hit by tighter regulations over the five years. For example, the Food and Drug Administration (FDA) in the US announced plans to reduce nicotine to non-addictive levels. The FDA followed this by pursuing a ban on menthol cigarettes.

It hasn’t just been regulatory concerns though. A French anti-smoking organisation also launched a legal complaint against British American Tobacco and three other companies, claiming they manipulate tests associated with nicotine levels in cigarettes.

Alongside these ongoing issues, the emergence of Environmental, Social and Governance (ESG) investing has also weighed on the company. There’s no doubt that smoking is detrimental to a person’s health. The consequence of this means a stock like British American Tobacco will get screened out of an ESG-based portfolio. This increases the selling pressure on the shares, which ultimately reduces the price.

Should I buy British American Tobacco shares?

If I was investing with ESG in mind, it’s fair to say I’d screen this company out of my investable universe. However, to counterbalance this, I do recognise that British American Tobacco is working towards its own ESG agenda. As an example, the company is investing in non-combustible products it says are “scientifically-substantiated, reduced-risk alternatives”.

I’m an income investor and I still view the shares as highly attractive. As mentioned, the forward dividend yield for 2022 is a sky-high 8.3%. What’s more, the company has been a regular dividend payer, even throughout its troubles in recent times. For example, the 10-year average dividend yield has been a highly respectable 4.8%.

Finally, the stock has become far cheaper over the past five years. Back in 2017, the shares were trading on a price-to-earnings (P/E) ratio of almost 18. Today though, the forward P/E is a lowly 8. I think this means the recent issues are fully priced in to the shares, given how much the valuation has fallen.

So, as an income stock, I’m going to keep my British American Tobacco shares. It’s a relatively small position. But the dividend yield is excellent, and I think the valuation already reflects the risks ahead. I’d also consider adding more shares to my portfolio to boost my passive income.

Dan Appleby owns shares of British American Tobacco. The Motley Fool UK has recommended British American Tobacco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.