Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that British American Tobacco p.l.c. (LON:BATS) is about to go ex-dividend in just 4 days. You can purchase shares before the 9th of July in order to receive the dividend, which the company will pay on the 19th of August.
British American Tobacco’s next dividend payment will be UK£0.53 per share. Last year, in total, the company distributed 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. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it’s growing.
Check out our latest analysis for British American Tobacco
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. 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 worried about the risk of a drop in 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. Over the last year it paid out 56% of its free cash flow as dividends, within the usual range for most companies.
It’s positive to see that British American Tobacco’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it’s easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. This is why it’s a relief to see British American Tobacco earnings per share are up 8.4% per annum 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.
Is British American Tobacco worth buying for its dividend? Earnings per share have been growing modestly and British American Tobacco paid out a bit over half of its earnings and free cash flow last year. In summary, while it has some positive characteristics, we’re not inclined to race out and buy British American Tobacco today.
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.
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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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