Interactive Investor

British American Tobacco shares rally after growth boost

8th June 2021 08:17

Richard Hunter from interactive investor

An extremely punchy yield of 7.7% is an ongoing attraction for income-seekers.

British American Tobacco (LSE:BATS) is firmly focused on the changing habits of consumers and has made further progress to that end during the first half of 2021.

The company reiterated its target of £5 billion of revenues from so-called New Category products (like vaping) by 2025 and 50 million consumers of non-combustible products by 2030. The latter figure currently stands at 14.9 million, having added 1.4 million consumers in the latest quarter.

At the same time, traditional sales have also held up on the whole, such that BATS has upped its revenue growth guidance for 2021 to over 5%, from a previous range of between 3-5%. Strong pricing overall, demonstrating once more the defensive nature of the stock, combined with a worthwhile contribution from the US, enabled the upgrade.

The company’s prodigious cash generation is one reason why it has been able to maintain its dividend, and the extremely punchy yield of 7.7% is an ongoing attraction for income-seekers. Equally, it is aiming to reduce its leverage position, where the net debt figure (previously around £40 billion) needs constant attention. Ambitious cost cutting targets and a general streamlining of operations may contribute to this cause in due course.

However, all is not plain sailing as is inevitably the case in this sector. The situation in India has reduced sales, as did the previous ban in South Africa, while the threat of litigation and regulation are ever-present threats. The recently reported move by the US to consider restricting nicotine levels is the latest, rather ominous, threat.

In addition, current travel restrictions have inevitably impacted on its duty free lines, with the company not expected a recovery in its Global Travel Retail business until next year.

Tastes are changing for investors as well as consumers. For BATS, there is a counter-intuitive claim from the company that it is highly rated in ESG terms, largely due to its drive towards carbon neutrality, but also due to external recognition of the group as both climate and diversity leaders. From an investment perspective, it is rather more difficult to envisage a situation in which a tobacco company could truly fit into the ESG category and as such this would continue to hamper the stock’s progress.

The stock has underperformed of late given the industry headwinds, having lost 13% over the last year, as compared to a gain of 9% for the wider FTSE 100 index. This has not been enough to deter supporters, however, given its cash generative abilities and generous dividend yield, with the market consensus resolutely remaining at a 'strong buy'.

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