ii view: vaping boom pushes BAT's smoke-free customers above 20 million

A dividend yield of over 6% and brands such as Rothmans, Lucky Strike and Vuse. We assess prospects. 

First-half results to 30 June

• Currency adjusted revenue up 3.7% to £12.86 billion
• Adjusted profit up 4.9% to £5.64 billion
• Adjusted net debt down 7.5% to £39.9 billion
• Previously announced a total dividend for the year up 1% to 217.8p per share

Chief executive Jack Bowles said:

“We are not immune, of course, to the increasing macro-economic pressures, exacerbated by the conflict in Ukraine. However, we are well positioned to navigate the current turbulent environment due to our powerful brands, operational agility and continued strong cash generation.

“With this strong start to the year, I am confident in achieving our full year guidance. While understanding that there is more to do, these results demonstrate the strong progress we are making in our Faster Transformation towards A Better Tomorrow."

ii round-up:

British American Tobacco's (LSE:BATS) move away from traditional tobacco products to alternatives such as vapour products, pouches and snuff continued during the first half of 2022. 

Revenue for alternatives, or what it calls New Categories, rose 45% to £1.28 billion, with customers for its non-combustible products up 2.1 million to 20.4 million. New category brands include Vuse, Vype, Glo and Velo. 

Traditional tobacco revenues rose by 0.6%, aided by robust pricing, helping overall currency adjusted group revenue rise 3.7% to £12.86 billion. That’s better than City forecasts for nearer to 2%. 

BAT shares rose by just under 1% in early UK trading having risen by 27% year-to-date coming into this latest announcement. Shares for UK rival Imperial Brands (LSE:IMB) are up by around 15% in 2022 and the FTSE All Share index is down by close to 4%. Tobacco’s inelastic demand and perceived defensive qualities are likely seen as offering protection should we enter a recession.

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Accompanying management outlook comments from BAT proved reassuring, highlighting its confidence in the company achieving current full-year expectations. 

Adjusted profit for the period rose 4.9% to £5.64 billion, helped by a more than 50% reduction in New Category losses to £222 million. Cost savings also fed into the mix, with savings in excess of £1.5 billion expected by the end of 2022. 

Reported profit for the half-year fell by a quarter year-over-year to £3.67 billion, hindered by a near £1 billion hit from the transfer of its Russian business following the invasion of Ukraine. There was also a charge of £450 million in relation to the investigation by the US Department of Justice into alleged sanctions breaches. 

BAT previously announced a total dividend for the year of 217.8p per share, up 1% on the prior year and payable in four quarterly instalments. 

A full-year trading update is scheduled for December. 

ii view:

Founded in 1902, BAT’s traditional cigarette or combustible brands today include Dunhill, Rothmans, Kent and Camel. Its collection of non-combustible products includes alternatives such as vapour products, tobacco heating items, and modern oral nicotine pouches.

BAT is now committed to reducing the health impact of its business through a multi-category approach. It is targeting £5 billion of revenue and profitability for its New Categories products by 2025, along with 50 million consumers of non-combustible products by 2030. Non-combustible products now account for 14.6% of group revenues, up from 4% in 2017.

In all, the bulk of BAT’s sales still come from traditional tobacco products, with ethical issues leaving the industry an untouchable sector for many ethical investors. Further increases in government regulations and duties cannot be dismissed, while the uncertain economic outlook warrants consideration. 

On the upside, new category sales are growing, a forecast dividend yield of over 6% is tough to ignore in an era of low interest rates, while strong cashflows now support an ongoing £2 billion share buyback programme. On balance, and given management’s focus on shareholder returns, income focused fans of the company are likely to stay put. 

Positives:

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

Negatives

• Uncertain economic outlook
• Currency movements can impact

The average rating of stock market analysts:

Strong buy