BAT shares sink despite dividend commitment

The income outlook at British American Tobacco (LSE:BATS) following its pledge to pay 60.06p a share for the next four quarters was today clouded by a negative City reaction to 2025 guidance.

Shares were trading at a two-year high prior to today’s annual results but fell as much as 9% after BAT forecast revenues growth of about 1% in the current year.

That was well short of hopes for 2.3%, reflecting headwinds in Bangladesh and Australia as well as assumptions of no meaningful impact from enforcement action on illicit vapes in the US.

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

Today’s results also disclosed a £6.2 billion provision after legislation in Canada enabled provincial governments to recover healthcare costs directly from tobacco manufacturers.

At an underlying level, chief executive Tadeu Marroco said BAT met targets in 2024 as it continued its transformation towards becoming a predominantly smokeless business by 2035.

He said the performance accelerated in the second half, driven by the phasing of innovation in new categories and the benefits of US commercial investment.

Smokeless products accounted for 17.5% of the group’s total revenue haul of £25.9 billion, a percentage point increase on 2023 as the number of users rose by 3.6 million to 29.1 million.

Revenue from combustibles lifted 0.1%, which reflected the benefit of price and mix after volumes fell 5.2%. New category revenues rose 8.9%, leaving the total figure 1.3% higher.

Adjusted earnings lifted 3.6% to 381.9p a share, which allowed BAT to declare a dividend of 240.24p a share based on a pay-out ratio of 66.3%. This is payable in four equal quarterly instalments of 60.06p on 7 May, 1 August, 7 November and 4 February.

The award is an increase of 2% on 2023, when shareholders got 58.88p a share each quarter.

The company has returned £28 billion to shareholders over the last five years, including 2024’s £700 million buyback of shares. This will be followed by £900 million in 2025.

The returns reflect 100% operating cash conversion over the last five years, with 2024’s 101% well ahead of BAT’s 90% target. The group generated £7.9 billion of free cash flow before dividends last year as it looks to achieve a total of £50 billion up to 2030.

• 10 shares to give you a £10,000 annual income in 2025
• BATS among 10 blue-chip stocks set to pay £3.2bn in dividends
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Morgan Stanley, which has an Underweight recommendation, said key questions for the company included the outlook for US cigarette volumes in 2025 following three consecutive years of double-digit percentage declines.

The bank also wanted to know more about expectations around e-cigarette regulation, particularly in relation to the banning of illicit disposable products in the US, and BAT’s capital allocation priorities for 2026 in light of the Canada litigation.

It has a price target of 2,700p, which compares with 3,153p after shares today settled about 255p lower. They were down at 2,276p in April last year.

BAT reiterated its ambition for 3-5% revenues and 4-6% adjusted profit from operations growth on a constant currency basis by 2026.

However, 2025 revenues are expected to be 1% higher based on a projection that global tobacco industry volumes will be down by about 2%.

• The Income Investor: upbeat about this FTSE 100 dividend stock
• Stockwatch: time to back this roller-coaster cyclical?

Headwinds included a decision by the interim government of Bangladesh, under IMF guidance, to increase VAT and supplementary duty on over 100 essential products, including tobacco.

BAT said the move is expected to result in an acceleration in illicit trade impacting the legal market, where it has 87% volume share. New tobacco regulations are also being introduced in Australia, where the company estimates about 65% of nicotine usage is now illicit.