ii view: BAT on target to be predominantly smokeless by 2035

Full-year trading update to 31 December

• Expect to deliver improved new category and combustibles revenue growth in second half versus the first half
• Expects improving new category profitability

Guidance:

• Continues to expect full-year low-single digit increases in revenue and adjusted profit
• Continues to target 3% to 5% revenue and mid-single digit adjusted profit growth by 2026.

Chief executive Tadeu Marroco said:“We are on track to deliver our 2024 guidance, demonstrating the strength and resilience of our business. Our second-half performance acceleration is driven by the phasing of new categories innovation, the benefits of investment in US commercial actions and the unwind of wholesaler inventory movements.

“We will continue to reward shareholders through strong cash returns, including our progressive dividend and sustainable share buyback, and we remain committed to returning to our mid-term guidance of 3-5% revenue and mid-single digit adjusted profit from operations growth on an organic constant currency basis by 2026.”

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ii round-up:

Founded in 1902, British American Tobacco (LSE:BATS) today employs more than 50,000 people, with a stock market value in the region of £64 billion. 

Its traditional cigarette or combustible brands include Rothmans, Dunhill, and Lucky Strike. Both Camel and Newport are US-specific brands. 

Its collection of non-combustible, or new category products, includes vapour product Vuse, tobacco heating brand Glo and modern oral brand Velo. 

For a round-up of this latest trading update announced on 11 December, please click here. 

ii view:

A constituent of the FTSE 100, the company competes against global rivals such as Philip Morris International Inc (NYSE:PM) and Altria Group Inc (NYSE:MO). Operating across more than 70 manufacturing plants, the US accounts for its biggest slug of profits at around 53%, followed by the Americas & Europe at almost 30%, and Asia Pacific, the Middle East & Africa the balance. 

BAT’s strategy includes growing its non-combustible, or new category, revenues to 50% by 2035, up from around 19% in 2023, along with driving a step change in its new category innovation capabilities and speed to market.

For investors, ethical concerns regarding consumer health issues for both traditional and new category products leave the industry untouchable for many. Moves to potentially ban new category products in countries such as Mexico should not be overlooked. Costs generally for businesses remain heightened, while industry-wide combustible tobacco volumes for its core US market have fallen 9% year-to-date, pressured by the tough economic backdrop and illegal single-use vapes. 

• Income Investor: lower-yielding stocks with dividend appeal
• 20 highest-yielding FTSE 100 shares in 2024
• The UK stock market outlook for 2025

More favourably, progress towards management’s ambition of becoming a predominantly smokeless business by 2035 is being made. There is diversity in brands and geographical regions, while its significant generation of cash provides financial flexibility, allowing it to either invest in the business, pay down debt, return cash to shareholders or pursue a combination. On balance, and while the shares remain un-investable for many on ethical grounds, an estimated future dividend yield of over 8% will likely continue to keep existing income-oriented investors sitting tight. 

Positives:

• Pushing innovation for new category products
• Attractive dividend yield (not guaranteed)

Negatives

• Uncertain economic outlook
• Currency movements can impact

The average rating of stock market analysts:

Strong hold