What Are British American Tobacco plc’s Dividend Prospects Like Beyond 2014?


Today I am looking at cigarette manufacturer British American Tobacco‘s (LSE: BATS) (NYSE: BTI.US) dividend outlook past 2014.

A smoking dividend selection

British American Tobacco has been an enviable deliverer of double-digit earnings growth over four of the past five years. This has enabled it to keep dividends rolling higher, and City analysts expect further expansion in the near-term. The firm is expected to have punched earnings growth of 4% in 2013 — results for which are due on Friday 28 February — with increases of 4% and 9% anticipated for 2014 and 2015 respectively.

However, this expected slowdown is expected to translate to lower dividend growth over the medium term, the company boasting a compound annual growth rate of 12.7% during 2008-2012.

By comparison, the tobacco play is expected to shell out a dividend of 142.2p per share for 2013, up just 5.4% from the previous year. And forecasters anticipate a 3.7% advance this year to 147.4p, although an acceleration to 161.3p in 2015, a 9.4% rise, represents a massive move back towards previous payout rises.

And despite this near-term dividend deceleration, investors must bear in mind that prospective payments for this year and next still create meaty yields, with readouts of 4.8% and 5.2% respectively. By comparison, the FTSE 100 currently sports a forward average of just 3.1%.

Traditionally, British American Tobacco’s dividend coverage of 1.5 times prospective earnings — comfortably below the security watermark of 2 times — through to end-2015 would not be a concern, the defensive nature of tobacco demand soothing fears over potential revenues pressure and subsequent impact on shareholder payouts.

However, the tobacco industry has taken a bashing from all quarters in recent times. The effect of macroeconomic troubles on consumers’ wallets has whacked demand for cigarettes, while rising health concerns and subsequent social pressures have also dented smokers’ buying habits. Meanwhile, a stepping-up of political activity across the world — from the introduction of plain packaging through to public smoking bans — is also weighing on the earnings outlook for cigarette manufacturers.

Still, in my opinion British American Tobacco is still ripe with opportunity. The company continues to expand its presence in developing markets, home to more than four-fifths of the planet’s smokers; its established brands, which include DunhillPall Mall and Lucky Strike, continue to grab market share; and the firm is due to enter the potentially explosive e-cigarette sub-sector in coming months. I believe that British American Tobacco remains on course to keep earnings and dividend growth moving solidly higher.

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> Royston does not own shares in British American Tobacco.