Can British American Tobacco's dividend continue to beat the wider market?
In an outcome that's tough on investors, the FTSE 100 (UKX) has failed to deliver a rising dividend payout over the last few years.
Just look at the iShares FTSE 100 ETF (LSE: ISF), for example. This is an exchange-traded fund that tracks the benchmark index, and we can see the aggregate payment from Britain's top 100 companies has yet to regain its pre-recession peak:
| Year | 2007 | 2008 | 2009 | 2010 | 2011 |
|---|
| Dividend per share | 19.1p | 20.2p | 17.1p | 16.2p | 18.1p |
However, some companies within London's premier index have performed well on dividends, despite these austere times, and this series aims to seek them out. One such name is British American Tobacco (LSE: BATS) (NYSE: BTI.US). Let's look at the firm's financial performance to see if it can continue to out-perform the index.
From its establishment in 1902, the company has grown to become the world's second largest cigarette manufacturer; distributing its addictive product just about everywhere it finds demand on the planet. With the shares at 3164p, the market cap is £61.4 billion. This table summarises the firm's recent financial record:
| Year | 2007 | 2008 | 2009 | 2010 | 2011 |
|---|
| Revenue (£m) | 10,018 | 12,122 | 14,208 | 14,883 | 15,399 |
| Net cash from operations (£m) | 2,600 | 3,539 | 3,878 | 4,490 | 4,566 |
| Adjusted earnings per share | 108.53p | 129.6p | 153.8p | 176.7p | 195.8p |
| Dividend per share | 66.2p | 83.7p | 99.5p | 114.2p | 126.5p |
So, the dividend has increased by 91% during the last five years -- equivalent to a 17.6% compound annual growth rate.
Against a backdrop of declining industry volumes, BATS continues to roll out its product from what appears to be a relentlessly efficient worldwide operation. Forty-six cigarette factories in some 39 countries fire the BATS production engine as consumers crave the firm's 300-plus brands.
Around 27% of turnover comes from the Asia Pacific region, 27% from Eastern Europe, the Middle East and Africa, 23% from the Americas, and 23% from Western Europe. Business has been highly cash-generative and that shows in the health of the dividend, which has grown impressively in recent years.
Despite escalating competition from illicit products, encouraged by what the company describes as, "Sharp increases in excise duty, pressure on consumers' disposable income, and ill-considered regulation of our industry," the firm's growth shows no sign of tapering out any time soon.
If BATS can keep converting its highly repetitive revenues to cash profits, as it has been, the prospects for the dividend are smokin'.
British American Tobacco's dividend growth score
I analyse four different features of a company to judge whether its dividend can continue to rise:
1. Dividend cover: both earnings and free cash cover the dividend about 1.5 times. 3/5
2. Net cash or debt: at the last count, net gearing was around 128%. 3/5
3. Cash flow: cash flow supports profits with both trending up. 5/5
4. Outlook and recent trading: cautiously positive. 4/5
Overall, I score the company 15 out of 20, which encourages me to believe its dividend can continue to out-pace dividends from the FTSE 100.
Foolish summary
BATS recurring revenues and its solid record converting those incomes to cash profits bodes well for the prospects of the dividend. The firm carries a fair amount of debt but manages interest payments comfortably with its steady cash flow.
Right now, the forecast full-year dividend is around 149p per share for 2013, which supports a possible income of 4.7%. That looks attractive to me.
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> Kevin does not own any shares mentioned in this article.
