British American Tobacco p.l.c.'s ( LON:BATS ) investors are due to receive a payment of £0.5445 per share on 10th of November. This means that the annual payment will be 6.5% of the current stock price, which is in line with the average for the industry.
British American Tobacco's Payment Has Solid Earnings Coverage
We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Prior to this announcement, British American Tobacco's dividend made up quite a large proportion of earnings but only 49% of free cash flows. This leaves plenty of cash for reinvestment into the business.
The next year is set to see EPS grow by 79.4%. If the dividend continues along recent trends, we estimate the payout ratio will be 54%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
British American Tobacco May Find It Hard To Grow The Dividend
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. However, British American Tobacco's EPS was effectively flat over the past five years, which could stop the company from paying more every year. There are exceptions, but limited earnings growth and a high payout ratio can signal that a company has reached maturity. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.
Our Thoughts On British American Tobacco's Dividend
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about British American Tobacco's payments, as there could be some issues with sustaining them into the future. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. Overall, we don't think this company has the makings of a good income stock.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 2 warning signs for British American Tobacco that investors need to be conscious of moving forward. Is British American Tobacco not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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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.
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