Interactive Investor

ii view: a pivotal year for BAT

13th December 2021 15:35

Keith Bowman from interactive investor

Targeting new category sales, cutting costs and a dividend yield of over 8%. We assess prospects. 

Second-half trading update

  • 3.6 million new consumers of non-combustible products, giving a total of 17.1 million
  • Full-year guidance unchanged

Chief executive Jack Bowles said:

“2021 is the pivotal year in our transformation journey to build A Better Tomorrow.

“Benefitting from a continued strong New Category performance, which is now a sizeable contributor to group revenue growth, we are making excellent progress towards our £5 billion revenue target by 2025.”

ii round-up:

Founded in 1902, British American Tobacco's (LSE:BATS) traditional cigarette or combustible brands today include Dunhill, Rothmans, Kent, Lucky Strike and Camel.

Its collection of non-combustible products includes alternatives such as vapour products, tobacco heating items, and modern oral nicotine pouches, as well as traditional oral products such as snus and moist snuff. 

New category brand names include Vuse, Vype, Glo and Velo. 

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

ii view:

Because of the obvious impact on health, tobacco companies like BAT have been investing in alternative products. BAT launched its first new category product not long after 2012. It is now targeting new category revenue of £5 billion come 2025. 

For investors, the bulk of BAT’s sales still come from traditional tobacco products, with ethical issues leaving the industry an untouchable sector for many. However, a historic and forecast dividend yield of over 8% is hard to ignore, especially in the current ultra-low interest rate environment. Evidence of growing new category sales also continues to be seen, and ethical issues now also need to be weighed against the group’s own Environmental, Social, and Governance (ESG) ambitions. In all, and given strong cash generation, the potential for share buybacks going forward and a generous dividend yield, the shares will likely appeal to long-term income-orientated investors. 

Positives:

  • Increased focus on new category vape products
  • Attractive dividend income

Negatives

  • Covid-19 travel bans hitting sales
  • Doubt over the safety of new category products

The average rating of stock market analysts:

Strong buy

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