British American Tobacco p.l.c. (LON:BATS) stock is about to trade ex-dividend in four days. This means that investors who purchase shares on or after the 9th of July will not receive the dividend, which will be paid on the 19th of August.
British American Tobacco's next dividend payment will be UK£0.53 per share, on the back of last year when the company paid a total of UK£2.03 to shareholders. Based on the last year's worth of payments, British American Tobacco stock has a trailing yield of around 6.9% on the current share price of £30.605. If you buy this business for its dividend, you should have an idea of whether British American Tobacco's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are 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. Its dividend payout ratio is 81% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. 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. Over the last year it paid out 56% of its free cash flow as dividends, within the usual range for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at British American Tobacco, with earnings per share up 8.4% on average over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. British American Tobacco has delivered 8.9% dividend growth per year on average over the past ten years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
Is British American Tobacco worth buying for its dividend? Earnings per share growth has been unremarkable, and while the company is paying out a majority of its earnings and cash flow in the form of dividends, the dividend payments don't appear excessive. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of British American Tobacco's dividend merits.
If you're not too concerned about British American Tobacco's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. Every company has risks, and we've spotted 2 warning signs for British American Tobacco you should know about.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. 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.
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