What does the BATS dividend increase mean for this high yielder?

Today the Lucky Strikes owner British American Tobacco (LSE: BATS) announced its final results for the past year – including a dividend increase. But the hike was much smaller than I would like. Here is what means for my portfolio.

A FTSE 100 high yielder

Tobacco shares commonly have high dividend yields and British American Tobacco is no exception. Its current dividend yield of 6.6% is well in excess of the average for FTSE 100 companies.

The company’s track record is impressive too. It has raised its dividend annually for over two decades. So today’s increase is simply the latest in a line of rises stretching back to before the start of this century.

A tiny rise

I was pleased to see the company announce another dividend raise today. But what disappointed me was the paltry size of the rise. At just 1%, it looked tokenistic to me. Revenue grew by 6.9% and diluted earnings per share increased 6%. The company obviously has cash it can return to shareholders, as shown by its announcement of a £2bn share buyback programme for the current year.

So plumping for a 1% dividend increase, much lower than is common at the firm, makes me question whether the company is giving its dividend the priority I think it deserves. After all, while the share price has risen 22% in the past 12 months, over five years it has fallen 34%. So dividends have been a key part of the shareholder reward for owning the company.

The tobacco giant did say it is committed to continue growing the dividend. But dividends are never guaranteed and there are risks in tobacco. Long-term decline in cigarette volumes could hurt revenues and profits, for example. I am glad that the company has reiterated its progressive dividend policy, but disappointed at the meagre size of this year’s increase.

The new dividend and yield

At the moment, the British American Tobacco dividend per share is £2.16 per year. That is set to grow to £2.18. With such a small increase, the dividend yield will barely shift. The current yield is 6.6%. Taking the increase into account, the prospective yield is still 6.6%. 

The small rise helps explain why the shares did not move much in early trading today. But while the yield has barely shifted, I still find it attractive. There are not many businesses of this one’s size yielding 6%. Fewer still have been raising their dividends annually for decades. That is not guaranteed to continue, but for now at least it has done. A 6.6% yield could be a welcome source of passive income in my portfolio.

I would buy BATS

Even after the share price increase in the past year, I continue to regard the dividend yield as attractive. The results underlined the company’s ability to find growth in an industry facing demand falls. Although its net debt of £36bn remains high, it is almost 10% lower than a year ago. Growing revenues and lower debt could help support the dividend in future. I would happily buy more British American Tobacco shares for my portfolio today.

Christopher Ruane owns shares in British American Tobacco. The Motley Fool UK has recommended British American Tobacco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.