British American Tobacco (Malaysia) Berhad (KLSE:BAT) is about to trade ex-dividend in the next 4 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company’s books in order to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase British American Tobacco (Malaysia) Berhad’s shares before the 14th of June in order to receive the dividend, which the company will pay on the 26th of June.

The company’s next dividend payment will be RM0.13 per share, and in the last 12 months, the company paid a total of RM0.88 per share. Calculating the last year’s worth of payments shows that British American Tobacco (Malaysia) Berhad has a trailing yield of 8.6% on the current share price of MYR10.28. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it’s growing.

See 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 96% 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. Over the last year it paid out 53% of its free cash flow as dividends, within the usual range for most companies.

It’s good to see that while British American Tobacco (Malaysia) Berhad’s dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

Story continues

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we’re concerned to see British American Tobacco (Malaysia) Berhad’s earnings per share have dropped 13% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. British American Tobacco (Malaysia) Berhad’s dividend payments per share have declined at 11% 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.

Final Takeaway

From a dividend perspective, should investors buy or avoid British American Tobacco (Malaysia) Berhad? Earnings per share have been shrinking in recent times. What’s more, British American Tobacco (Malaysia) Berhad is paying out a majority of its earnings and over half its free cash flow. It’s hard to say if the business has the financial resources and time to turn things around without cutting the dividend. It’s not an attractive combination from a dividend perspective, and we’re inclined to pass on this one for the time being.

Although, if you’re still interested in British American Tobacco (Malaysia) Berhad and want to know more, you’ll find it very useful to know what risks this stock faces. Every company has risks, and we’ve spotted 2 warning signs for British American Tobacco (Malaysia) Berhad you should know about.

Generally, we wouldn’t recommend just buying the first dividend stock you see. Here’s a curated list of interesting stocks that are strong dividend payers.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here