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British American Tobacco plc Dividends Look Solid

The tobacco business has provided many a fortune to its investors over the years, but with society turning increasingly away from the noxious stuff, is British American Tobacco (LSE: BATS) (NYSE: BTI.US) still worth buying as a dividend investment.

Here’s a look at how things have been going for the last five years, together with forecasts for two more:

Year
(to Dec)
EPS Change Dividend Yield Change Cover
2009 +19% 99.5p 4.9% +18.9% 1.55x
2010 +15% 114.2p 4.6% +14.8% 1.55x
2011 +11% 126.5p 4.1% +10.8% 1.55x
2012 +5% 134.9p 4.3% +6.6% 1.53x
2013 +5% 142.4p 4.4% +5.6% 1.53x
2014*
-3% 146.4p 4.1% +2.8% 1.45x
2015*
+8% 157.3p 4.4% +7.4% 1.45x

* forecast

The story so far

There have been some very impressive rises, in line with growth in earnings per share (EPS), in the past.

In fact, if you’d bought British American Tobacco shares five years ago at a price of around 1,965p, last year’s dividend would have given you an effective yield of 7.2% on the price you paid.

But it’s quite clear that EPS growth is slowing and the pace of dividend rises is being held back along with it.

Yields are holding up, but that’s partly because the share price has stagnated since early 2013, standing at 3,594p today. So has the growth that’s taken the share price up more than 80% over the past five years come to a halt?

smokingVolumes dipping

The problem, of course, is falling consumption. In 2013, cigarette volume fell by 2.7% to 676 billion, and the year before that we heard of a 1.6% fall to 694 billion. And by the halfway stage this year, volume had dropped by 0.4% to 331 billion.

But against that general decline, British American Tobacco is focusing on marketing what it calls its “Global Drive Brands”, aimed at more affluent customers and commanding higher margins. And that market segment saw volumes rise by 5.7% in the first six months of this year.

The question is whether the drive to higher-margin product mixes will keep earnings, and dividends, growing at a faster pace that inflation — because that’s what really matters for those building a retirement portfolio from which to take income in 20 years time or more.

The forecast drop in EPS this year will be partly down to the strength of sterling, which has gained about 4% over the past 12 months — although it has been falling back of late.

High single-digit growth

Chairman Richard Burrows told us at interim time that, thanks to the firm’s increasing market share in its top brands, “We remain confident of high single-digit earnings growth at constant rates of exchange, which we have said we will recognise with an increase in the dividend“.

For how long remains to be seen, but I reckon there are a few years of inflation-busting dividend rises still to be had.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.