Can the British American Tobacco dividend keep growing?

When it comes to dividends from blue-chip firms, few can match British American Tobacco (LSE: BATS). Not only has the dividend grown every year this century, but the current yield is a juicy 5.9%.

With the FTSE 100 tobacco company releasing its interim results today (31 July), it seems like a good moment to reflect on the prospects for the dividend.

Critical to the investment case

With a share price up 37% so far this year – and 60% over five years – it might seem as if the dividend is not as central to the British American Tobacco investment case as it once was.

I think it is, though. That share price rise has been part of a wider rerating of tobacco shares as investors consider their long-term prospects and seek reliable income streams in a stormy market.

Not that tobacco dividends are guaranteed any more than any others, of course: British American’s London-listed rival Imperial Brands slashed its payout per share in 2020.

Consumer demand for cigarettes is in long-term structural decline. Massive cash flows supporting beefy dividends are therefore crucial to the investment case for British American Tobacco. Management knows this. That is why the company has a progressive dividend policy, meaning it aims to keep growing its payout per share each year.             

Key business in long-term decline

The interim results contained no surprises on that front. British American typically pays four equal quarterly dividends and uses its final results to announce a raise. In today’s update, the firm explicitly restated its commitment to dividend growth (in sterling terms) for the full year. With a share buyback likely reducing share count, that equates to growth in the dividend per share, as has been the case each year for decades already.

But business continues to be challenging.

Revenues fell 2% year on year. That reflected a 4% hit from currency movements, though. Still, that weak performance is despite the pricing power of brands like Lucky Strike helping the company mitigate volume declines.

Cigarette volumes continued to decline, from 4% in the Americas and Europe to 14% In Asia Pacific, the Middle East, and Africa due in part to weak performance in Australia and Bangladesh.

British American also reported declining market share. So not only is total market size in long-term decline, but the company’s relative slice of that pie shrunk slightly.

Sometimes, though, it makes sense to give up some market share rather than sell products at prices that hurt profitability. Still, the overall picture here is one of decline in the core cigarette business. Non-cigarette businesses delivered flat revenues year on year.

Still one to consider

Like its rivals, British American tobacco has been battling falling cigarette demand and tough regulatory restrictions for decades already – but unlike some competitors it has kept the dividend growing.

The company delivered £1.3bn in free cash flows before paying dividends in the first half. It expects to generate generate around £50bn of free cash flow before dividends between 2024 and 2030.

The challenges are substantial and likely to keep growing. But British American Tobacco remains a free cash flow machine. It may well be able to keep growing its dividend per share each year thanks to those massive cash flows. I see it as an income share for investors to consider.