BAT overcomes hurdles to grow annual profits
Life doesn't get any easier for tobacco companies, but there are enough positives here to underpin the City's overall bullish mood. ii's head of markets runs through the full-year results.
12th February 2026 08:21
by Richard Hunter from interactive investor
British American Tobacco (LSE:BATS) is continuing to position itself to reflect the changing landscape of smokeless products, while navigating an ever-growing number of hurdles.
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The pressure on traditional tobacco products has been in evidence for some considerable time, driven both by changing lifestyle habits as well as increasing regulation. There have been several instances of governments toughening their stance on tobacco sales, especially to youngsters, which adds to the burden of regulatory censure which has plagued the sector over recent years. In addition, and quite apart from this general decline in traditional tobacco products sales as health issues come to the fore, there is a reluctance among some investors to invest in the sector at all on ethical grounds.
For BATS, these issues are in sharp focus. The group previously announced a provision of £6.2 billion to settle legal claims in Canada, some of which has now been released, positively distorting the profit number. Even so, whether this is the thin end of the wedge remains to be seen, and the ruling is in addition to the likes of Australia and Bangladesh, where regulatory headwinds and significant excise increases have hampered performance.
Elsewhere, the sale of illicit vapour products in the US has already crimped profits in this major market, although BATS is hopeful that the early signs of Federal and State enforcement will mitigate this issue in due course.
The need for a long-term replacement for traditional combustible products has left the tobacco majors needing to move from a standing start, and after some years of development the New Categories business is showing some meaningful progress. Such products now account for 18.2% of overall revenues, with an ultimate target of 50% as the group aims to become a predominantly “smokeless” business by 2035, while adding 4.7 million customers in the period, upping the current total to 34.1 million.
The successful launch of Velo Plus in the US, which is the largest market for BATS at 45% of revenues contributed to sales growth of 5.5% over the year at constant currency. For New Categories as a whole, double digit revenue growth in the second half propelled the full year outturn to a positive 7%, with BATS noting a 77% increase in contribution to the group to £442 million.
Overall revenue of £25.61 billion for 2025 was marginally ahead of expectations and up by 2.1% on a constant currency basis. Adjusted profit from operations rose 2.3% to £11.28 billion. The group remains a cash-generation machine which should help bring the group’s leverage back to within its preferred lower range by the end of this year. It has also enabled the announcement of a further £1.3 billion share buyback programme in addition to the group’s progressive dividend policy, where the projected yield of 5.5% is punchy by any standards and is adequately covered.
BATS has also maintained its forecast for the coming year, with revenues growing within a range of 3% to 5%, underneath which the group expects low double digit growth in New Categories, leading to a jump in adjusted profit of between 4% and 6%. This comes against global tobacco industry volumes being expected to fall by 2% this year.
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Set against these tides of turbulence, investors have been handsomely rewarded of late for their patience, notwithstanding that the price remains some 20% shy of the record 2017 levels. The shares have risen by 30% over the last year, as compared to an increase of 19% for the wider FTSE100, and by 83% over the last two years.
The group is continuing to record prodigious cash generation, which enables a generous shareholder return focus, reduction of debt and investment in transitioning the company. A slightly stretched valuation does little to upset prospects, with the market consensus of the shares as a buy reflecting ongoing optimism that the group can continue to flourish in a new world.
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