Yahoo Finance Don't Buy British American Tobacco (Malaysia) Berhad (KLSE:BAT) For Its Next Dividend Without Doing These Checks
Readers hoping to buy British American Tobacco (Malaysia) Berhad (KLSE:BAT) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Thus, you can purchase British American Tobacco (Malaysia) Berhad's shares before the 6th of June in order to receive the dividend, which the company will pay on the 20th of June.
The company's next dividend payment will be RM00.10 per share, and in the last 12 months, the company paid a total of RM0.63 per share. Last year's total dividend payments show that British American Tobacco (Malaysia) Berhad has a trailing yield of 7.1% on the current share price of RM08.90. If you buy this business for its dividend, you should have an idea of whether British American Tobacco (Malaysia) Berhad's dividend is reliable and sustainable. As a result, readers should always check whether British American Tobacco (Malaysia) Berhad has been able to grow its dividends, or if the dividend might be cut.
View our latest analysis for British American Tobacco (Malaysia) Berhad
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, British American Tobacco (Malaysia) Berhad paid out 93% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 90% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.
Cash is slightly more important than profit from a dividend perspective, but given British American Tobacco (Malaysia) Berhad's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. British American Tobacco (Malaysia) Berhad's earnings per share have fallen at approximately 17% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. British American Tobacco (Malaysia) Berhad's dividend payments per share have declined at 14% per year on average over the past 10 years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.
To Sum It Up
Is British American Tobacco (Malaysia) Berhad an attractive dividend stock, or better left on the shelf? Not only are earnings per share declining, but British American Tobacco (Malaysia) Berhad is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. Bottom line: British American Tobacco (Malaysia) Berhad has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
With that being said, if you're still considering British American Tobacco (Malaysia) Berhad as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 2 warning signs for British American Tobacco (Malaysia) Berhad (of which 1 makes us a bit uncomfortable!) you should know about.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
