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In the case of dividends from blue-chip corporations, few can match British American Tobacco (LSE: BATS). Not solely has the dividend grown yearly this century, however the present yield is a juicy 5.9%.
With the FTSE 100 tobacco firm releasing its interim outcomes immediately (31 July), it looks like an excellent second to replicate on the prospects for the dividend.
Important to the funding case
With a share worth up 37% thus far this yr – and 60% over 5 years – it might sound as if the dividend will not be as central to the British American Tobacco funding case because it as soon as was.
I believe it’s, although. That share worth rise has been a part of a wider rerating of tobacco shares as buyers take into account their long-term prospects and search dependable earnings streams in a stormy market.
Not that tobacco dividends are assured any greater than any others, in fact: British American’s London-listed rival Imperial Manufacturers slashed its payout per share in 2020.
Shopper demand for cigarettes is in long-term structural decline. Large money flows supporting beefy dividends are due to this fact essential to the funding case for British American Tobacco. Administration is aware of this. That’s the reason the corporate has a progressive dividend coverage, that means it goals to continue to grow its payout per share every year.
Key enterprise in long-term decline
The interim outcomes contained no surprises on that entrance. British American usually pays 4 equal quarterly dividends and makes use of its last outcomes to announce a elevate. In immediately’s replace, the agency explicitly restated its dedication to dividend progress (in sterling phrases) for the complete yr. With a share buyback doubtless decreasing share rely, that equates to progress within the dividend per share, as has been the case every year for many years already.
However enterprise continues to be difficult.
Revenues fell 2% yr on yr. That mirrored a 4% hit from forex actions, although. Nonetheless, that weak efficiency is regardless of the pricing energy of manufacturers like Fortunate Strike serving to the corporate mitigate quantity declines.
Cigarette volumes continued to say no, from 4% within the Americas and Europe to 14% In Asia Pacific, the Center East, and Africa due partly to weak efficiency in Australia and Bangladesh.
British American additionally reported declining market share. So not solely is whole market dimension in long-term decline, however the firm’s relative slice of that pie shrunk barely.
Generally, although, it is smart to surrender some market share fairly than promote merchandise at costs that damage profitability. Nonetheless, the general image right here is one in all decline within the core cigarette enterprise. Non-cigarette companies delivered flat revenues yr on yr.
Nonetheless one to think about
Like its rivals, British American tobacco has been battling falling cigarette demand and difficult regulatory restrictions for many years already – however not like some opponents it has stored the dividend rising.
The corporate delivered £1.3bn in free money flows earlier than paying dividends within the first half. It expects to generate generate round £50bn of free money movement earlier than dividends between 2024 and 2030.
The challenges are substantial and more likely to continue to grow. However British American Tobacco stays a free money movement machine. It could effectively be capable to continue to grow its dividend per share every year due to these large money flows. I see it as an earnings share for buyers to think about.
