British American Tobacco p.l.c. (LON:BATS) will pay a dividend of £0.5445 on the 2nd of February. Based on this payment, the dividend yield will be 6.8%, which is fairly typical for the industry.
See our latest analysis for British American Tobacco
British American Tobacco's Earnings Easily Cover The Distributions
We aren't too impressed by dividend yields unless they can be sustained over time. The last payment made up 92% 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 83.7%. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 53% which would be quite comfortable going to take the dividend forward.
The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2012, the annual payment back then was £1.26, compared to the most recent full-year payment of £2.18. This implies that the company grew its distributions at a yearly rate of about 5.6% over that duration. A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.
The Dividend's Growth Prospects Are Limited
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Although it's important to note that British American Tobacco's earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time. There are exceptions, but limited earnings growth and a high payout ratio can signal that a company has reached maturity. 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, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We would probably look elsewhere for an income investment.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 3 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Join A Paid User Research Session
You'll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here