ii view: dividend star British American Tobacco on track in 2024

First-half trading update

• Low-single digit fall in revenues and adjusted profit year-to-date

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:

"Our year-to-date performance is in line with our expectations, and we are on track to deliver our guidance of low-single digit revenue and adjusted profit from operations growth on an organic3, constant currency basis in 2024.

Looking forward, we expect growing momentum in the second half, enabled by the investments we are making today."

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ii round-up:

Cigarette and vape maker British American Tobacco (LSE:BATS) today reiterated its forecast for low single-digit increases in both revenue and adjusted profit with progress expected to be second half weighted. 

Factors including pressured US consumer spending and failed law enforcement against the growing illicit vapour trade have contributed toward low single-digit declines in revenue and adjusted profit during the first half of the financial year. However, wholesaler inventory movements and the phasing of new category product launches are both expected by management to help drive growth in the second half. 

Shares in the FTSE 100 company fell 1% in UK trading having come into this latest news up around 6% year-to-date. That’s similar to rival Imperial Brands (LSE:IMB) and in line with the FTSE 100 index so far this year. 

BAT’s traditional cigarette, or combustible brands include Rothmans, Dunhill, and Lucky Strike. Non-combustible, or New Categories includes vapour product Vuse, tobacco heating brand Glo and modern oral brand Velo. 

Combustibles industry volumes declined by 9% year to date, although BAT's cigarette volume share improved 0.3% across its eight key markets which account for 65% of combustible sales. 

For new category products, the Vuse vape maintained its global value share leadership, retaining a 41.1% share across key markets. Gains in Africa and the Middle East were countered by falls in the US due to the ongoing use of illicit single use vapes.

For its glo tobacco heated brand, an encouraging early consumer response to its new glo Hyper Pro is expected to help drive full-year volume share gains. A year-to-date market share loss of 0.2% had improved from a 1.1% loss in 2023.  

Continued market leadership outside the US had pushed strong revenue and profit growth year-to-date for its modern oral Velo product. 

BAT continues to target 3-5% revenue and mid single-digit adjusted profit growth by 2026, driven by its emphasis on smokeless products. 

Broker Morgan Stanley reiterated its ‘overweight’ stance post the update, flagging a price target of 2,800p. First-half results are scheduled for 25 July. 

ii view:

Started in 1902, the company is today a constituent of the FTSE 100, competing against global rivals such as Philip Morris International Inc (NYSE:PM) and Altria Group Inc (NYSE:MO). Employing more than 50,000 people, it operates across more than 70 manufacturing plants. The US accounts for its biggest chuck of profit 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 New Categories revenue to 50% of the group total by 2035, up from around 19% in 2023, and to make a step change in its non-combustibles innovation capabilities and speed to market.

For investors, and given health concerns for both traditional and new category products, ethical issues continue to leave the industry untouchable for many investors. Combustible tobacco industry volumes have fallen 9% year-to-date, with pressured consumer spending, particularly in the US, likely encouraging more users to try and quit. Illegal single use vapes are taking away business, while a focus on reducing group net debt persists. 

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To the upside, growing sales for lower health risk new category products is now the core management focus. Both diversity of brands and geographical regions exists, while significant cash generation provides financial flexibility, allowing it to either invest in the business, pay down debt, return cash to shareholders or a combination of these.    

For now, and while many investors now avoid tobacco stocks on ethical grounds, a forecast dividend yield of over 9% will likely continue to attract income investors. 

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:

Buy