British American Tobacco (LON:BATS) Is Increasing Its Dividend To UK£0.54

By
Simply Wall St
Published
April 28, 2022
LSE:BATS
Source: Shutterstock

British American Tobacco p.l.c. (LON:BATS) will increase its dividend on the 17th of August to UK£0.54. This makes the dividend yield about the same as the industry average at 6.5%.

View our latest analysis for British American Tobacco

British American Tobacco's Payment Has Solid Earnings Coverage

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Prior to this announcement, British American Tobacco's dividend made up quite a large proportion of earnings but only 55% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.

The next year is set to see EPS grow by 8.7%. If the dividend continues on this path, the payout ratio could be 71% by next year, which we think can be pretty sustainable going forward.

historic-dividend
LSE:BATS Historic Dividend April 28th 2022

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2012, the dividend has gone from UK£1.14 to UK£2.18. This implies that the company grew its distributions at a yearly rate of about 6.7% over that duration. A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

British American Tobacco May Find It Hard To Grow The Dividend

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. However, British American Tobacco has only grown its earnings per share at 3.6% per annum over the past five years. Slow growth and a high payout ratio could mean that British American Tobacco has maxed out the amount that it has been able to pay to shareholders. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company's dividend prospects.

Our Thoughts On British American Tobacco's Dividend

Overall, it's great to see the dividend being raised and that it is still in a sustainable range. The payout ratio looks good, but unfortunately the company's dividend track record isn't stellar. The payment isn't stellar, but it could make a decent addition to a dividend portfolio.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 2 warning signs for British American Tobacco that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.