Yahoo Finance British American Tobacco's (LON:BATS) Shareholders Will Receive A Bigger Dividend Than Last Year
British American Tobacco p.l.c.'s (LON:BATS) dividend will be increasing to UK£0.54 on 17th of August. This makes the dividend yield about the same as the industry average at 6.2%.
View our latest analysis for British American Tobacco
British American Tobacco's Dividend Is Well Covered By Earnings
Solid dividend yields are great, but they only really help us if the payment is sustainable. Before this announcement, British American Tobacco was paying out 73% of earnings, but a comparatively small 55% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.
Looking forward, earnings per share is forecast to rise by 8.7% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 71% by next year, which is in a pretty sustainable range.
Dividend Volatility
Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2012, the first annual payment was UK£1.27, compared to the most recent full-year payment of UK£2.18. This implies that the company grew its distributions at a yearly rate of about 5.6% over that duration. We like to see dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.
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. Earnings has been rising at 3.7% per annum over the last five years, which admittedly is a bit slow. There are exceptions, but limited earnings growth and a high payout ratio can signal that a company has reached maturity. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company's dividend prospects.
Our Thoughts On British American Tobacco's Dividend
In summary, it's great to see that the company can raise the dividend and keep it in a sustainable range. While the payout ratios are a good sign, we are less enthusiastic about the company's dividend record. The payment isn't stellar, but it could make a decent addition to a dividend portfolio.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 2 warning signs for British American Tobacco that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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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.
