Interactive Investor

BAT dividend commitment and 10% yield trigger shares rally

Sentiment towards the tobacco giant hadn’t been this bad for at least 14 years, but there are some clear positives in today’s results. There’s also news about a takeover bid for DS Smith.

8th February 2024 14:03

Graeme Evans from interactive investor

Top-yielding British American Tobacco (LSE:BATS) today extended its 25 years of dividend growth as annual results lifted the mood around a company whose valuation sank 30% in 2023.

BAT’s plan to pay shareholders four instalments of 58.87p a share between 2 May and 3 February next year represents an overall increase of 2% on a year earlier. At the current share price, the dividend yield is almost 10%. 

Jefferies said the continued progressive dividend policy was one of the results-day positives at a time when sentiment on BAT is “worse than we have ever known it in 14 years of coverage”.

Other reasons for cheer included BAT’s disclosure it is looking to improve balance sheet flexibility by selling some of its century-old shareholding in Indian conglomerate ITC.

Shares were up over 7% at one stage Thursday at 2,499p, as the results contained no further shocks after December’s warning that 2023 figures will include a write-down of £27.3 billion on the value of acquired US assets.

Revenues across cigarettes and vaping products rose 3.1% on an adjusted basis, with non-combustibles accounting for 16.5% of the total and new categories in profit two years earlier than expected.

Investment to support the US business is expected to impact the 2024 performance, but chief executive Tadeu Marroco sees 3-5% growth in organic revenues and adjusted operating profits growth in the mid-single digits by 2026.

He added: “We are committed to continuing to reward shareholders with strong cash returns throughout this period.”

His reassurance came as the company recorded a fourth consecutive year of 100% operating cash conversion, enabling the return of £26.2 billion to shareholders in the period from 2019.

Over the next five years, BAT expects to generate around £40 billion of free cash flow. As well as its commitment to a progressive dividend it will evaluate opportunities to return excess cash to shareholders once its debt leverage target is reached.

The shares, which trade with a dividend yield of about 10%, have been driven to levels last seen in 2010 as the US industry contends with economic pressures, the rise of illicit single-use vapour products and regulatory uncertainty.

interactive investor has just teamed up with experts at eyeQ who use artificial intelligence, macro factors and their own smart machine to generate actionable trading signals. Here’s what it says about BAT: “The rally in BAT shares after today’s earnings report looks overdone from a macro perspective. According to our smart machine, the shares now sit 5.75% rich to aggregate macro conditions.

“However, macro relevance sits just below 65%, our threshold for an indication that a macro regime (the story of the day) is critical to the share’s performance.

“In fact, macro relevance hasn’t been above that critical 65% mark since November. The implication is that investors can currently focus a little less on the big picture macro stuff when looking at British American Tobacco. At least for now, macro is playing second fiddle to company news.” 

BAT was overtaken at the top of today’s FTSE 100 risers board by DS Smith (LSE:SMDS) after the packaging, paper and recycling firm disclosed a “highly preliminary” takeover approach from rival Mondi (LSE:MNDI). 

The company, which traces its roots back to a box-making business started by the Smith family in East London in the 1940s, employs more than 30,000 people and has a market value of more than £4 billion following today’s rise.

The interest of Mondi, whose shares fell 29p to 1,352p, follows recent consolidation in the industry after Smurfit Kappa Group (LSE:SKG) announced a merger with US-based WestRock Co (NYSE:WRK).

On the FTSE 100 fallers board, SSE (LSE:SSE) shares dropped 45.5p to 1,607.5p after the power firm made no change to guidance for adjusted earnings per share (EPS) of “more than 150p”. The City’s forecast for the year to 31 March stood at 160p.

UBS notes that SSE raised EPS guidance in its two previous third-quarter trading statements, when good performances from flexible thermal operations more than offset renewables output. “Both are now weak at the same time”, it added.

SSE’s renewables output was around 15% behind plan for the nine months to 31 December, largely due to exceptionally still and dry weather conditions but also reflecting short-term plant outages and rephasing of flexible hydro output into the fourth quarter.

This represents a 10% shortfall relative to planned output for the full year. 

In addition, turbine installation on the Dogger Bank A offshore wind farm development has been affected by challenging weather conditions with vessel availability and supply chain delays further impacting progress.

On a more positive note, SSE said its net zero-focused strategy continued to benefit from a favourable long-term policy and regulatory environment. 

Peel Hunt, which maintained its “buy” recommendation and price target of 2,060p following the update, said it continues to expect a full-year dividend in line with guidance at 60p a share.

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