ii view: income play BAT buoyed by non-tobacco products

First-half trading update to 30 June

• Low-single digit New Categories revenue growth

Guidance:

• Now expects full-year revenue growth of 1-2%, up from 1% previously
• Continues to expect growth in adjusted full-year profits (EBIT) of between 1.5% and 2.5%

Chief Executive Tadeu Marroco said:

“We expect low-single digit New Category revenue growth in H1, accelerating to mid-single digit for FY. Excluding the impact of the U.S. and Canada Vapour markets, we expect double-digit New Category revenue growth for FY.

“While there is more to do, I am encouraged by the progress we are making through our Quality Growth focus, and prioritising investment to the largest profit pools.”

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ii round-up:

Started in 1902, British American Tobacco (LSE:BATS) today sells both traditional or combustible tobacco as well as so called New Category products such as vapes. 

Combustible brands include Rothmans, Dunhill, and Lucky Strike, with Camel and Newport each specific to the USA.

New category brands include Vuse, Glo and Velo.

For a round-up of this latest trading update, please click here. 

ii view:

Headquartered in London and a constituent of the FTSE 100, BAT competes against global rivals such as Philip Morris International Inc (NYSE:PM) and Altria Group Inc (NYSE:MO). Combustible products continue to account for most revenues, with New Category, or smokeless products like vapes making up 17.5% of overall revenues in 2024. Geographically, the US generated most sales last year at 44%, followed by the Americas and Europe at 36%, and the rest of the world the balance of 20%.  

For investors, ethical concerns regarding consumer health issues for both traditional and new category products leave the industry untouchable for many. A price/earnings (PE) ratio above the three-year average may suggest the shares are not obviously cheap. The initiative by Canada to make tobacco manufacturers pay directly for healthcare costs could be repeated elsewhere, while moves to potentially ban new category products in countries such as Mexico also warrant firm consideration.

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On the upside, a push regarding new category innovation and products is feeding into management’s target to raise smokeless revenues to 50% of the group’s total by 2035. Both diversity of brands and geographical regions exist. A focus on reducing group net debt is ongoing, while the generation of significant cashflows continues to underpin shareholder returns, including a £1.1 billion share buyback programme for 2025. 

On balance, and while the shares remain off-limits for many on ethical grounds, a forecast dividend yield of over 6.5% will likely keep the attention of income investors. 

Positives:

• Pushing innovation for new category products
• £1.1 billion 2025 share buyback programme

Negatives

• Uncertain economic outlook
• Currency movements can impact

The average rating of stock market analysts:

Buy