British American Tobacco's (LON:BATS) Upcoming Dividend Will Be Larger Than Last Year's

Simply Wall St
May 12, 2022
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British American Tobacco p.l.c. (LON:BATS) will increase its dividend on the 17th of August to UK£0.54. This takes the annual payment to 6.4% of the current stock price, which is about average for the industry.

See our latest analysis for British American Tobacco

British American Tobacco's Payment Has Solid Earnings Coverage

Unless the payments are sustainable, the dividend yield doesn't mean too much. The last payment made up 73% of earnings, but cash flows were much higher. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

Over the next year, EPS is forecast to expand by 8.7%. If the dividend continues along recent trends, we estimate the payout ratio will be 71%, which is in the range that makes us comfortable with the sustainability of the dividend.

LSE:BATS Historic Dividend May 12th 2022

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2012, the dividend has gone from UK£1.27 to UK£2.18. This implies that the company grew its distributions at a yearly rate of about 5.6% over that duration. 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

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Earnings has been rising at 3.7% per annum over the last five years, which admittedly is a bit slow. British American Tobacco's earnings per share has barely grown, which is not ideal - perhaps this is why the company pays out the majority of its earnings to shareholders. This isn't the end of the world, but for investors looking for strong dividend growth they may want to look elsewhere.

Our Thoughts On British American Tobacco's Dividend

Overall, this is a reasonable dividend, and it being raised is an added bonus. While the payout ratios are a good sign, we are less enthusiastic about the company's dividend record. Taking all of this into consideration, the dividend looks viable moving forward, but investors should be mindful that the company has pushed the boundaries of sustainability in the past and may do so again.

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. For example, we've picked out 2 warning signs for British American Tobacco that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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