British American Tobacco raises dividend as profits up

The transition to 'new category' products gains momentum, as this value stock enjoys a day in the sun.

The move away from traditional tobacco products into “New Category” products is gaining extra momentum as time passes, with a 2025 target of £5 billion of revenue in sight.

For this reporting period, significant investment into these new categories is beginning to show meaningful results. Adjusted revenues rose by 51%, underpinned by growth in the likes of vapour products, where revenues rose by 59%. Overall losses were reduced for the first time and by 9%, while 4.8 million consumers of non-combustibles were added to British American Tobacco (LSE:BATS)’s reach, bringing the current total to 18.3 million.

These step changes in growth are bringing the longer-term aims of the new categories into sharp focus. Apart from the 2025 £5 billion revenue target, the company is also aiming for 50 million consumers by 2030. At present, non-combustibles account for 12% of group revenues (up from just 4% in 2017) with the direction of travel clearly becoming established.

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In the meantime, the key driver to revenues and profit overall remains traditional products and, for the most part, group metrics are slightly ahead of expectations. Adjusted revenues rose by 6.9% in the period, operating margin was reasonably steady at the extremely strong level of 43.4% and adjusted profits from operations were ahead by 5.2%.

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Alongside the bumper levels of cash generation, which the company continues to achieve, there were also annualised cost savings of some £1.3 billion, while net debt was also reduced by 11% to stand at £35.5 billion. This has enabled an increase to a dividend payment, which has risen every year since 1999, with the projected yield of just under 7% remaining a magnetic consideration for income-seeking investors. Nor does the largesse of shareholder returns stop there, with the company simultaneously announcing a share buyback of £2 billion for this year.

Of course, there are also other concerns that have tended to overhang the industry. Litigation has been a sporadic issue over the last decade, while regulation remains on the minds of governments worldwide with health benefits in mind. From an investment perspective, the sector has more recently been overlooked by some investors who are simply unable to enter the fray on ethical grounds.

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Of late, however, there may be some winds of change. Recent market volatility and the rotation away from growth stocks into value has refocused attention on the likes of the oil and tobacco stocks. However unfashionable they may be, propelled by strong cash generation, inelastic demand and generous dividend yields, the likes of British American Tobacco are having their own day in the sun at present.

Indeed, the share price is ahead by 21% over the last year, as compared to a 17% hike for the wider FTSE 100, and much of that strength has been seen in the early weeks of 2022. With the company’s own upbeat outlook predicting a continuation of current progress, and with new category products expected to maintain their ascent, the market consensus of the shares as a strong buy will almost certainly remain intact.