Don't Race Out To Buy British American Tobacco (Malaysia) Berhad (KLSE:BAT) Just Because It's Going Ex-Dividend

Simply Wall St
November 07, 2021
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It looks like British American Tobacco (Malaysia) Berhad (KLSE:BAT) is about to go ex-dividend in the next 3 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Therefore, if you purchase British American Tobacco (Malaysia) Berhad's shares on or after the 12th of November, you won't be eligible to receive the dividend, when it is paid on the 25th of November.

The company's next dividend payment will be RM0.26 per share. Last year, in total, the company distributed RM0.83 to shareholders. Last year's total dividend payments show that British American Tobacco (Malaysia) Berhad has a trailing yield of 5.5% on the current share price of MYR15.06. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether British American Tobacco (Malaysia) Berhad has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for British American Tobacco (Malaysia) Berhad

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year British American Tobacco (Malaysia) Berhad paid out 98% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. It paid out an unsustainably high 225% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how British American Tobacco (Malaysia) Berhad intends to continue funding this dividend, or if it could be forced to cut the payment.

As British American Tobacco (Malaysia) Berhad's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

KLSE:BAT Historic Dividend November 8th 2021

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by British American Tobacco (Malaysia) Berhad's 21% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. British American Tobacco (Malaysia) Berhad has seen its dividend decline 10% per annum on average over the past 10 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

Should investors buy British American Tobacco (Malaysia) Berhad for the upcoming dividend? Not only are earnings per share declining, but British American Tobacco (Malaysia) Berhad is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of British American Tobacco (Malaysia) Berhad.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with British American Tobacco (Malaysia) Berhad. For example, we've found 2 warning signs for British American Tobacco (Malaysia) Berhad that we recommend you consider before investing in the business.

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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