Dividend stock BAT issues revenue upgrade

At any given time, progress in the tobacco sector is hard-won and the increasing list of headwinds shows no sign of abating.

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.

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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.

At the full-year results, British American Tobacco (LSE:BATS) announced a provision of £6.2 billion following legislation in Canada which will enable provincial governments to recover healthcare costs directly from tobacco manufacturers. 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.

Such governmental crackdowns also unleash a proliferation of trading in illicit products, which provides yet another headwind. In the US for example, the group’s largest market, legal industry volumes in Vapour products are down by a factor of a mid-teens percentage drop in this year alone, a trend which has also extended to Canada.

Nonetheless, the need for a long-term replacement for traditional combustible products left the tobacco majors needing to move from a standing start, and even after some years of development the New Categories unit this has yet to make a meaningful contribution to profits.

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There has undoubtedly been some progress and at the latest count smokeless products accounted for 17.5% of overall revenues last year, with an ultimate target of 50% as the group aims to become a predominantly “smokeless” business by 2035. 

In the meantime, the group’s prodigious cash generation has kept the wolves at bay. Net debt continues to reduce and in terms of shareholder returns, around £1.1 billion has come in the form of share buybacks while a dividend yield of 7.2% remains punchy by any standards.

This has also enabled a slight upgrade to guidance, where the projected 1% revenue growth at the annual results was the source of some significant disappointment, and BATS is cautiously increasing this to a 1% to 2% range for the full year, followed by 3% to 5% in 2026. 

The most meaningful growth this year is likely to be weighted towards the second half, as the group plans new category innovation in key markets, in what would be something of an echo of last year’s performance. The successful launch of Velo Plus in the US will also be large contributor to the region returning to revenue and profit growth for the year.

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Despite the tides of turbulence, investors have been handsomely rewarded of late for their patience. The shares have risen by 38% over the last year, as compared to a gain of 6.2% for the wider FTSE100 and the group remains committed to a higher level of shareholder returns including further buyback programmes, despite the investment needed in transitioning the company.

BATS has also gained the support of investors in passing Imperial Brands (LSE:IMB) to become the preferred play in the sector, with the market consensus of the shares as a comfortable buy reflecting its continually resilient performance in response to the myriad of challenges.