British American Tobacco p.l.c. (LON:BATS) Goes Ex-Dividend In 3 Days

British American Tobacco p.l.c. (LON:BATS) stock is about to trade ex-dividend in 3 days time. If you purchase the stock on or after the 24th of December, you won't be eligible to receive this dividend, when it is paid on the 6th of February.

British American Tobacco's next dividend payment will be UK£0.51 per share, and in the last 12 months, the company paid a total of UK£2.03 per share. Based on the last year's worth of payments, British American Tobacco stock has a trailing yield of around 6.2% on the current share price of £32.555. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for British American Tobacco

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. British American Tobacco paid out more than half (74%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether British American Tobacco generated enough free cash flow to afford its dividend. It distributed 45% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that British American Tobacco's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see British American Tobacco earnings per share are up 5.6% per annum over the last five years. Decent historical earnings per share growth suggests British American Tobacco has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. British American Tobacco has delivered 9.3% dividend growth per year on average over the past ten years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Has British American Tobacco got what it takes to maintain its dividend payments? While earnings per share growth has been modest, British American Tobacco's dividend payouts are around an average level; without a sharp change in earnings we feel that the dividend is likely somewhat sustainable. Pleasingly the company paid out a conservatively low percentage of its free cash flow. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

Ever wonder what the future holds for British American Tobacco? See what the 19 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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