British American Tobacco p.l.c. (LON:BATS) has announced that it will pay a dividend of £0.5445 per share on the 10th of November. Based on this payment, the dividend yield will be 6.3%, which is fairly typical for the industry.
British American Tobacco's Dividend Is Well Covered By Earnings
Solid dividend yields are great, but they only really help us if the payment is sustainable. The last payment made up 92% of earnings, but cash flows were much higher. This leaves plenty of cash for reinvestment into the business.
The next year is set to see EPS grow by 80.7%. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 54% which brings it into quite a comfortable range.
The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from an annual total of £1.26 in 2012 to the most recent total annual payment of £2.18. This means that it has been growing its distributions at 5.6% per annum over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. British American Tobacco might have put its house in order since then, but we remain cautious.
The Dividend's Growth Prospects Are Limited
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Unfortunately, British American Tobacco's earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. That's fine as far as it goes, but we're less enthusiastic as this often signals that the dividend is likely to grow slower in the future.
Our Thoughts On British American Tobacco's Dividend
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about British American Tobacco's payments, as there could be some issues with sustaining them into the future. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. This company is not in the top tier of income providing stocks.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. 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. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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British American Tobacco
British American Tobacco p.l.c. provides tobacco and nicotine products to consumers worldwide.
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Good value average dividend payer.