Is British American Tobacco plc A Super Income Stock?

Does British American Tobacco plc (LON: BATS) have the right credentials to be classed as a very attractive income play?

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british american tobacco / imperial tobacco

Throughout the credit crunch, British American Tobacco (LSE: BATS) (NYSE: BTI.US) has been an incredibly reliable income stock. As well as its share price doubling over the last five years (from £16.50 to its current price of around £33), it has increased dividends per share at an annualised rate of 9.4% over the last four years.

However, with a combination of sluggish earnings growth and a higher share price, is British American Tobacco still a super income stock?

With a yield of 4.3%, British American Tobacco continues to offer a generous income. It compares favourably to the FTSE 100 (which has a yield of around 3.5%) as well as being considerably higher than a typical high-street savings account and inflation.

Where British American Tobacco really comes into its own, though, is in regard to the consistency of its dividend. Unlike many companies listed on the FTSE 100, whose profits are largely dependent upon the level of economic growth, British American Tobacco is an ‘all-weather’ dividend payer. In other words, even during a recession it is likely to not only maintain its dividend per share payments, but increase them — just as it has done during the credit crunch. This should provide investors not only with a relatively high source of income but also a reliable one.

In addition, British American Tobacco is forecast to increase dividends per share at a brisk pace over the next two years. A rate of growth of just under 5% is forecast by the market and, although profits are set to flatline in 2014, the company has the financial strength to continue to increase payments when this is the case.

The attraction of British American Tobacco as an income play should not give the impression that management is being overly generous with regard to the proportion of profits paid out as a dividend. In 2013, 65% of profit was paid out in dividends and, since British American Tobacco is a mature company operating in a mature sector (and is therefore relatively stable) it could afford to increase the payout ratio. Doing so would make it an even more attractive income play.

So, with a yield of 4.3%, reliable dividend per share growth and the scope to pay out a greater proportion of profit as a dividend, British American Tobacco should still be classed as a super income stock.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter does not own shares in British American Tobacco.

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