Dividends are the main attraction for buy-side investors British-American tobacco (LSE:BATS) shares. Its addictive products deliver solid cash flows, which are the lifeblood of any company’s dividend policy.

British Americans have consistently raised annual dividends for decades. City analysts predict a continuation of this trend, which means that the dividend yield will be at a level well above the yield FTSE100average 3.1%.

If current forecasts prove correct, today’s £20,000 investment in UK-US shares will pay a total dividend of £2,730 by the end of 2027.

However, brokers’ forecasts are never stationary. So how realistic are current dividend forecasts? And more broadly, should investors consider adding the tobacco titan to their portfolios?

Good news!

As for the first question, things are looking good on the dividend front. British American remains cash-rich, as evidenced by its involvement in significant share buybacks.

Just today (December 9), the company announced plans to repurchase another £1.3 billion of equity in 2026. Successful debt reduction also strengthens these plans – British Americans expect leverage to fall by 2 to 2.5 times by the end of next year.

On the other hand, dividend cover is not as solid as the balance sheet. And this poses some risks.

Expected payouts range from 1.4 to 1.5 times projected earnings by the end of 2027. The readings are well below the assumed safety level of two times. They also leave no room for error if profits veer off course.

But is this a breakthrough for such shares of tobacco companies? I think not. Once again, the addictive nature of nicotine products means that earnings are unlikely to deviate from those expected by brokers.

Indeed, impoverished dividend coverage has long been a feature of this reliable dividend producer.

So what’s wrong?

The prospect of juicier dividends is certainly attractive. But the Briton’s investment case is more than just passive income.

And as cigarette consumption continues to decline, I am aware that the company’s stock price may continue to decline. Today, the company reiterated its prediction that the global tobacco market will shrink by 2% in 2025.

Brands like Happy Stroke AND Dunhill they are helping to keep the wolf from the door right now. Growing demand for non-flammable products (such as Vuse vapes) also raises the top line. In 2025, the company recorded a 2% boost in group sales.

In my opinion, however, it is only a matter of time before concerns about sales prospects appear. The world continues to move towards a smoke-free world, and modern categories are also subject to increased scrutiny from regulators. There is also a huge problem of counterfeiting industrial products, especially in the USA.

Is the British a good buy?

I don’t think this risk is inherent in the British company’s sky-high valuation. At £41.75, the company is trading at a trailing price-to-earnings (P/E) ratio of 31 times.

This is significantly higher than the five-year average of 13.5 times and reflects a 42% boost in the company’s share price this year.

I won’t be buying UK-US shares myself. However, it may be worth considering this option for investors who have greater confidence in the broader tobacco market.