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华尔街日报We Wouldn't Be Too Quick To Buy British American Tobacco p.l.c. (LON:BATS) Before It Goes Ex-Dividend
British American Tobacco p.l.c. (LON:BATS) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase British American Tobacco's shares before the 29th of December in order to be eligible for the dividend, which will be paid on the 4th of February.
The company's next dividend payment will be UK£0.6006 per share, on the back of last year when the company paid a total of UK£2.40 to shareholders. Looking at the last 12 months of distributions, British American Tobacco has a trailing yield of approximately 5.7% on its current stock price of UK£42.19. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. British American Tobacco distributed an unsustainably high 174% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether British American Tobacco generated enough free cash flow to afford its dividend. Dividends consumed 61% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and British American Tobacco fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Check out our latest analysis for British American Tobacco
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. British American Tobacco's earnings per share have fallen at approximately 11% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, British American Tobacco has lifted its dividend by approximately 5.0% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. British American Tobacco is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
To Sum It Up
Is British American Tobacco an attractive dividend stock, or better left on the shelf? Earnings per share have been shrinking in recent times. Worse, British American Tobacco's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with British American Tobacco. Case in point: We've spotted 3 warning signs for British American Tobacco you should be aware of.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.