British American Tobacco's (LON:BATS) Dividend Will Be Increased To £0.5772

The board of British American Tobacco p.l.c. (LON:BATS) has announced that it will be paying its dividend of £0.5772 on the 18th of August, an increased payment from last year's comparable dividend. This makes the dividend yield 8.2%, which is above the industry average.

View our latest analysis for British American Tobacco

British American Tobacco's Payment Has Solid Earnings Coverage

A big dividend yield for a few years doesn't mean much if it can't be sustained. Before this announcement, British American Tobacco was paying out 74% of earnings, but a comparatively small 53% of free cash flows. This leaves plenty of cash for reinvestment into the business.

Over the next year, EPS is forecast to expand by 44.0%. If the dividend continues along recent trends, we estimate the payout ratio will be 56%, which is in the range that makes us comfortable with the sustainability of the dividend.

Dividend Volatility

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 £1.35 in 2013 to the most recent total annual payment of £2.31. This implies that the company grew its distributions at a yearly rate of about 5.5% over that duration. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.

The Dividend Has Limited Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Over the past five years, it looks as though British American Tobacco's EPS has declined at around 31% a year. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

Our Thoughts On British American Tobacco's Dividend

In summary, while it's always good to see the dividend being raised, we don't think British American Tobacco's payments are rock solid. 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. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 3 warning signs for British American Tobacco that investors should know about before committing capital to this stock. Is British American Tobacco not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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