Analyst names top pick in this high-flying sector

British American Tobacco today retained the support of a leading City bank after it said its “top pick” was still attractively valued following the sector’s re-rating in 2025.

Bank of America said British American Tobacco (LSE:BATS)’s investment case combined strong cash returns with sustainable growth prospects, primarily due to a top-line boost from Velo nicotine pouches.

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The bank expects that “evergreen” share buybacks will support an annual earnings per share growth rate of 8% up to 2030, alongside an attractive and growing dividend yield of 6%.

It has a price target of 4,500p, up from this week’s level of 4,240p as it expects a more modest share price performance by the sector in 2026. BAT currently trades on a forward price/earnings multiple of 12 times, representing a 30% discount to EU staples.

On Imperial Brands (LSE:IMB), the bank believes that its cash returns profile is now fully priced in after a meaningful re-rating since the end of 2023. It has a Neutral stance.

Last year was a strong one for the tobacco sector, boosted by the defensive appeal of its strong cash flow generation and visibility on shareholder returns.

It also benefited from reduced regulatory risk following the withdrawal of the US menthol ban, as well as a more favourable White House stance on tobacco companies.

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Sentiment towards BAT was further supported by the successful rollout of Velo+ in the US, which Bank of America said had helped to de-risk BAT's growth algorithm.

BAT’s share price rose by about 45% in 2025, making it a top performer alongside Japan Tobacco as the sector’s valuation multiple lifted from 10.5 times 12-month forward earnings in 2024 to 14.3 times by the end of December.

This was offset by lower consensus earnings estimates for 2025, which in the case of BAT fell by 10% due to factors such as higher taxation on tobacco products in Bangladesh and the impact of a weak US dollar.

EPS estimates fell by about 3% for Imperial, whereas US tobacco companies Altria and PMI saw an increase in expectations.

Bank of America said BAT’s market-leading share price performance also reflected investor confidence in its ability to deliver on its targets, starting in 2026 with 3-5% sales growth and adjusted earnings growth of 4-6% at constant currency.

The projections are underpinned by an improved performance in the US following the launch of Velo+, combined with improving volumes in US cigarettes.

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Key events for the industry in the year ahead include the release of the EU’s revised Tobacco Products Directive, which will set rules on manufacturing, packaging, sales and advertising.

BofA said: “While the final outcome remains uncertain, industry experts anticipate the inclusion of nicotine pouches and harmonised regulation across the EU, which could require markets that previously banned pouches to permit their sale.

“However, stricter flavour restrictions and additional labelling requirements are likely, given their appeal to younger consumers.”

It expects further US Food and Drug Administration approvals for nicotine pouches in 2026, which the bank views positively given the rise in illicit vape sales driven by limited legal product availability.