How Sustainable is the British American Tobacco Dividend?

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How Sustainable is the British American Tobacco Dividend?

In anticipation of the first quarter results from British American Tobacco (BATS), I use the hiatus to cast an eye over the last annual results from BAT in order to get some idea of what we should be looking for. I might add that we have a little time to wait, as I understand that the Q1 results to 31st March are published on the 29th of July. The last trading statement said that revenue was down 5.7% in Q1.

I have not been bullish of BAT, being somewhat spooked by the twin peak formation of the share price chart, which according to technical folk law, suggests that the price may have reached a momentous peak. Since then, the share price has come down enough to break the share price uptrend, which according to my observation, has been in place since 2014. You will note that the share price peaked at 3,894p in March. Last seen – having gone through a trend support line – it was 3,569p. The chart now resembles a series of peaks like some alpine vista, which thus constitutes the big overhead resistance to the share price progress. So what should we look for when the next results are published?

The first thing for bulls to hope for is some sign for an improvement in revenue in Q2. Annual sales revenue in 2014 fell 8.45%, depressing statutory reported trading profit, which is an important component of the company’s operating cash flow. In fact, during 2014 the operating profit figure was more than a fifth larger than the operating cash flow figure, indicating the crucial importance of operating profit as a contributor to operating cash flow. In contrast, see how small the contribution of depreciation is. That strikes me as a weakness, which needs to be put right.

Thus, it is no surprise to learn that management have attempted to boost sales revenue by raising prices. How feasible is that in a highly price competitive market where contraband cigarettes play a big part and BAT’s big advantage of influential big brand names is under threat of plain packaging in more places?

BAT’s operating cash flow was consequently down more than 16% last year – an event, the significance of which, is to be seen in the fact that the dividend consumed 78% of last year’s operating cashflow. In 2012, because operating profits were higher (and the dividend of course lower) the annual dividend took only 52% of operating cash flow. The pips are beginning to squeak.

Returning to consensus estimates, I observe that the latest market forecast for next year is for a 3% decline in sales revenue. I also note that they are looking for an absence of growth in earnings this year. Interestingly, the company has dropped Cazenove as a corporate broker and appointed Deutsche Bank to work alongside UBS. That is a momentous change – a bit like the Kaiser dropping Bismarck as Chancellor. Frankly, I continue to be nervous about BAT’s prospects as a continuing dividend provider; something that has not been the case for many a long year.

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