Is British American Tobacco (Malaysia) Berhad (KLSE:BAT) A Good Dividend Stock?
Today we'll take a closer look at British American Tobacco (Malaysia) Berhad (KLSE:BAT) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
In this case, British American Tobacco (Malaysia) Berhad likely looks attractive to investors, given its 6.5% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.
Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, British American Tobacco (Malaysia) Berhad paid out 98% of its profit as dividends. Its payout ratio is quite high, and the dividend is not well covered by earnings. If earnings are growing or the company has a large cash balance, this might be sustainable - still, we think it is a concern.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. British American Tobacco (Malaysia) Berhad paid out 132% of its free cash flow last year, which we think is concerning if cash flows do not improve. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. 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.
We update our data on British American Tobacco (Malaysia) Berhad every 24 hours, so you can always get our latest analysis of its financial health, here.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. For the purpose of this article, we only scrutinise the last decade of British American Tobacco (Malaysia) Berhad's dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was RM2.4 in 2011, compared to RM0.8 last year. The dividend has shrunk at around 9.9% a year during that period. British American Tobacco (Malaysia) Berhad's dividend has been cut sharply at least once, so it hasn't fallen by 9.9% every year, but this is a decent approximation of the long term change.
We struggle to make a case for buying British American Tobacco (Malaysia) Berhad for its dividend, given that payments have shrunk over the past 10 years.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Over the past five years, it looks as though British American Tobacco (Malaysia) Berhad's EPS have declined at around 23% a year. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.
Conclusion
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. British American Tobacco (Malaysia) Berhad paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Earnings per share are down, and British American Tobacco (Malaysia) Berhad's dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with British American Tobacco (Malaysia) Berhad from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 3 warning signs for British American Tobacco (Malaysia) Berhad (of which 1 shouldn't be ignored!) you should know about.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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About KLSE:BAT
British American Tobacco (Malaysia) Berhad
Manufactures, imports, markets, and sells cigarettes, pipe tobaccos, cigars, devices, and other tobacco and nicotine products primarily in Malaysia.
Fair value with mediocre balance sheet.