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In recent years, tobacco companies have lost their status as stock market darlings, but British American Tobacco (BAT) could be an exception. While its total return over the past decade has been negative 6%, compared to the S&P 500's 231% gain, BAT's dividend yield has risen to just under 10%, making it an attractive proposition for income investors.

BAT, one of the largest tobacco/nicotine companies globally, has faced headwinds from declining smoking rates worldwide. To counter this, the company has consistently raised cigarette prices, resulting in a 5.7% increase in revenue over the past five years. Furthermore, BAT expects to generate over $50 billion in free cash flow in the next five years, highlighting its potential discounted valuation.

Recognizing the need to diversify beyond traditional cigarettes, BAT has been investing in new nicotine products. These include nicotine pouches, e-vapor, and heat-not-burn cigarette devices, which may offer fewer harmful health effects compared to traditional smoking. The company's "new categories" segment, which includes these products, experienced 21% revenue growth in 2023 and is expected to reach $5 billion in annual revenue soon. This segment finally achieved profitability last year, driving a positive contribution profit for BAT for the first time.

While the long-term outlook for the cigarette business is uncertain, BAT's new nicotine products could drive future volume growth and potentially offset any profit declines. This diversification strategy makes it an interesting prospect for investors considering long-term stability.

One key concern for income investors is the sustainability of BAT's dividend payments. However, considering the company's financials, there is room to maintain its current dividend level and even potential for future growth. With a free cash flow of $5.30 per share over the last 12 months, compared to the current dividend of $2.90 per share, BAT appears capable of sustaining its dividend payout.

While income investors may find BAT's dividend yield appealing, it's important to consider other factors before making an investment decision. The Motley Fool's Stock Advisor analyst team, for instance, has identified 10 stocks they believe have greater potential returns, and BAT did not make the list. It's essential to conduct thorough research and consider diversification when making investment choices.

In conclusion, British American Tobacco exhibits potential as an undervalued income investor's dream. Its ability to maintain its dividend payments, robust cash flows, and investments in new nicotine products provide optimism for long-term growth. However, investors should examine all available options and consider their own investment strategies before making a decision.