Readers hoping to buy British American Tobacco p.l.c. (LON:BATS) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 25th of March to receive the dividend, which will be paid on the 12th of May.
British American Tobacco's next dividend payment will be UK£0.54 per share, and in the last 12 months, the company paid a total of UK£2.16 per share. Based on the last year's worth of payments, British American Tobacco has a trailing yield of 7.7% on the current stock price of £27.925. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. It paid out 75% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Dividends consumed 53% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
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.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see British American Tobacco earnings per share are up 3.9% per annum over the last five years. A high payout ratio of 75% generally happens when a company can't find better uses for the cash. Combined with slim earnings growth in the past few years, British American Tobacco could be signalling that its future growth prospects are thin.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, British American Tobacco has lifted its dividend by approximately 8.0% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
The Bottom Line
Has British American Tobacco got what it takes to maintain its dividend payments? Earnings per share have been growing modestly and British American Tobacco paid out a bit over half of its earnings and free cash flow last year. Overall, it's hard to get excited about British American Tobacco from a dividend perspective.
So if you want to do more digging on British American Tobacco, you'll find it worthwhile knowing the risks that this stock faces. Every company has risks, and we've spotted 2 warning signs for British American Tobacco you should know about.
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.
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