British American Tobacco (NYSE: BTI), one of the leading global tobacco companies, is well diversified, both geographically and across its product portfolio.

It owns traditional cigarette brands like Camel and Newport, as well as next-gen products like Vuse vapes and Velo nicotine pouches. Like most of its peers in the tobacco industry, British American Tobacco is known for its high dividend yield, currently at 8.5%.

Tobacco stocks went on a tear earlier this year, seemingly as dividend-hungry investors moved into the sector ahead of expected interest rate cuts. Over the last month, however, the stock has pulled back, and one analyst believes the stock has further to fall.

Morgan Stanley sees British American Tobacco heading lower

In a recent note, Morgan Stanley gave British American Tobacco a double downgrade, lowering its rating on the stock from overweight (buy) to underweight (sell). The investment bank said the company was at risk due to an inability to enforce regulations against flavored disposable e-cigarettes in the U.S., echoing concerns from CEO Tadeu Marroco.

Morgan Stanley predicted that competition from illegal vaping products in the U.S. would weigh on the business, forecasting a low-single-digit decline in U.S. sales in fiscal 2025 and 2026.

It gave the stock a price target of $33.

Is British American Tobacco stock a sell?

Many investors own the stock for the dividend while understanding that tobacco companies are grappling with strong industry headwinds.

And British American Tobacco looks cheap at a price-to-earnings ratio of 6.3, but that's to be expected for a company with declining demand for its core product. Organic revenue was down 0.8% year over year, and revenue from new categories was up just 7.4%. Vape volumes were down 9.0%, showing the challenges in that market.

However, the regulatory landscape in the U.S. could change to the company's advantage, and it's seeing strong growth from Velo nicotine pouches.

The U.S. challenges alone may not be enough of a reason to sell the stock, especially since the all-important dividend remains safe, but investors should temper any growth expectations they had.

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