Where Next for British American Tobacco PLC (BTI)’s Dividend?

Is BAT’s dividend safe?
Leaving aside the never-ending debate about what will happen when tobacco smoking is legislated out of existence — something I don’t expect to see in my life — we need to understand how secure the company’s dividend is and, in particular, how sustainable its current rate of growth is likely to be.

Much of BAT’s recent growth and strength is derived from its strong and growing presence in emerging markets. Although the ethics of promoting smoking to poorly educated people might be dubious, there’s no doubt that it’s an effective way to drive revenue and profit growth, and I think it has further to run. BAT’s two highest-volume regions are now Asia-Pacific and EEMEA (Eastern Europe, Middle East, and Africa), which together accounted for 62% of the company’s volume in the first nine months of 2012.

At the same time, I think BAT’s dividend payout is reaching the limit of what’s affordable in terms of cash flow, and I agree with brokers’ consensus forecasts, which suggest that dividend growth will slow to about 7% per year over the next couple of years, down from 10% to 15% per year over the last few years.

Despite this, BAT is likely to retain its impressive ability to generate free cash flow for many years to come, and I believe its current 4% dividend yield is a pretty safe bet for the next couple of years at least and will continue to grow ahead of inflation.

The article Where Next for British American Tobacco’s Dividend? originally appeared on Fool.com.

Roland does not own shares in British American Tobacco. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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