British American Tobacco Plc’s Dividend Prospects For 2014 And Beyond

Many top FTSE 100 companies are currently offering dividends that knock spots off the interest you can get from cash or bonds.

In this festive series of articles, I’m assessing how the companies measure up as income-generators, by looking at dividends past, dividends present and dividends yet to come.

Today, it’s the turn of tobacco giant British American Tobacco (LSE: BATS) (NYSE: BTI.US).

Dividends past

The table below shows British American Tobacco’s five-year earnings and dividend record.

  2008 2009 2010 2011 2012
Statutory earnings per share (EPS) 123.3p 137.0p 145.2p 157.1p 198.1p
Dividend per share 83.7p 99.5p 114.2p 126.5p 134.9p
Dividend growth 26.4% 18.9% 14.8% 10.8% 6.6%

As you can see, British American Tobacco has delivered overall stellar dividend growth across the last five years. The average annual increase works out at a hugely impressive 15.5% — streets ahead of inflation.

However, as you’ve also probably spotted, the rate of dividend growth has decelerated year on year. Nevertheless, the 6.6% rise for the most recent year is still healthy — and broadly in line with the long-run growth rates of companies such as GlaxoSmithKline and Diageo.

British American Tobacco paid a total of 558.8p a share in dividends over the five years, covered 1.4 times by total statutory EPS of 760.7p. For the most recent year, dividend cover was 1.5.

This cover is below average, but British American Tobacco’s captive-customer base of nicotine addicts provides a good degree of earnings visibility, and a relatively low level of cover needn’t be a major cause for concern.

A spectacular dividend performance, latterly moderating to the more typical dividend growth-rate of a mature, cash-generative company.

Dividends present

British American Tobacco has so far paid an interim dividend of 45p for the current year. The analyst consensus is for a final dividend of 97.4p when the company announces its annual results on 27 February — giving a 2013 full-year payout of 142.4p (5.6% up on 2012).

Analysts see ‘adjusted’ (underlying) EPS rising by the same 5.6% percentage as the dividend, to 218p from last year’s 206.5p; thus, maintaining dividend cover at 1.5.

At a share price of 3,195p, British American Tobacco’s current-year dividend represents a yield of 4.5%.

Dividends yet to come

Analysts are forecasting British American Tobacco’s dividend to rise by 6.3% to 151.4p for 2014. EPS is expected to increase to 232p, again at around the same rate as the dividend; and, of course, again maintaining cover at 1.5.

Tobacco companies face long-term headwinds from regulation and health education. The last year or two — and forecasts for this year and next — suggest that British American Tobacco and its peers may find it harder to deliver quite the same excellent revenue growth, margins and dividend increases as in the past.

Longstanding shareholders may have grown used to annual dividend growth in double figures, but mid-single-digit increases may be a more realistic expectation for the future.

You may be interested to discover whether British American Tobacco has made it into the select group of blue chips pinpointed as FTSE 100 winners by our top analysts in this free Motley Fool report.

Our analysts believe this elite group of companies has what it takes to deliver superior long-term earnings and income growth. Such is their conviction about the quality of these businesses that they've called the report "5 Shares To Retire On".

You can download this free report right now -- simply click here.

> G A Chester does not own any shares mentioned in this article. The Motley Fool has recommended shares in GlaxoSmithKline.