Income investors should know that British American Tobacco plc (LON: BATS) is going ex-dividend soon

It looks like British American Tobacco plc (LON: BATS) is set to be ex-dividend within the next three days. The ex-dividend date is a business day before a company’s registration date, which is the date the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is an important date to know, as any purchase of shares made after this date may mean a late settlement which does not appear on the registration date. In other words, investors can buy shares of British American Tobacco before September 30 in order to be eligible for the dividend, which will be paid on November 11.

The company’s next dividend payment will be £ 0.54 per share. Last year, in total, the company distributed £ 2.16 to shareholders. Calculating the value of last year’s payouts shows British American Tobacco has a return of 8.1% on the current share price of £ 26.58. If you are buying this company for its dividend, you should know if the British American Tobacco dividend is reliable and sustainable. It is therefore necessary to check whether dividend payments are covered and whether profits are growing.

See our latest review for British American Tobacco

Dividends are usually paid out of the company’s profits, so if a company pays more than it earned, its dividend is usually at risk of being reduced. It paid out 78% of its profits as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a downturn in activity. We would be concerned if profits started to decline. A useful secondary check may be to assess whether British American Tobacco has generated enough free cash flow to pay its dividend. Dividends consumed 62% of the company’s free cash flow last year, which is within a normal range for most dividend-paying organizations.

It is encouraging to see that the dividend is covered by both earnings and cash flow. This usually suggests that the dividend is sustainable, as long as profits don’t drop sharply.

Click here to view the company’s payout ratio, as well as analysts’ estimates of its future dividends.

LSE: BATS Historical Dividend September 26, 2021

Have profits and dividends increased?

Companies with consistently rising earnings per share usually make the best dividend-paying stocks because they generally find it easier to raise dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold massively at the same time. That’s why it’s a relief to see British American Tobacco earnings per share grow 3.2% per year over the past five years. A payout rate of 78% sounds like an unspoken signal from management that the opportunities for reinvestment in the business are low. In line with the limited earnings growth in recent years, this is not the most attractive combination.

Many investors will assess a company’s dividend yield by evaluating how much dividend payments have changed over time. Since our data began 10 years ago, British American Tobacco has increased its dividend by around 6.6% per year on average. It is encouraging to see the company raising its dividends as profits rise, suggesting at least some corporate interest in rewarding shareholders.

The bottom line

Is British American Tobacco an attractive dividend-paying stock, or better still, is it left on the shelf? Earnings per share grew modestly, and British American Tobacco paid out just over half of its earnings and free cash flow last year. Overall, it’s not a bad combination, but we think there is probably a more attractive dividend outlook.

So, if you want to do more research on British American Tobacco, you will find that it is worth knowing the risks that this stock faces. Be aware that British American Tobacco displays 2 warning signs in our investment analysis, and 1 of them makes us a little uncomfortable …

If you are in the dividend-paying stock market, we recommend that you check out our list of the highest dividend-paying stocks with a yield above 2% and a future dividend.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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