Interactive Investor

Income stock BAT sees tobacco alternatives boom

28th July 2021 09:18

Keith Bowman from interactive investor

Growing vape sales, cost cuts and a dividend yield of over 7%. Buy, sell or hold?

First-half results to 30 June

  • Revenue down 0.8% to £12.17 billion
  • Profit from operations down 3.7% to £4.91 billion
  • Debt down 10.8% to £45 billion

British American Tobacco's (LSE:BATS) push towards new category products and away from traditional tobacco items remains ongoing. 

New category revenues rose by 40.4% to £883 million in the half-year to June, leaving it on track to meet its target of generating £5 billion in alternative, or new category product revenue by 2025. New category customer numbers have grown by 2.6 million to a total of 16.1 million, with its goal of 50 million non-combustible product consumers by 2030 also on track. 

Full-year new category losses are expected to reduce, with a move into profitability now high on the agenda for investors and a management target of 2025 in place. 

More broadly, profit from operations fell by 3.7% to £4.91 billion, hindered by a combination of factors, including increased investment in its new category offering and foreign exchange headwinds. Cost savings continue to be made, with a £1 billion target now increasing to £1.5 billion by 2022. And group debt is down by 10.8% to £45 billion. It previously declared a dividend of 215.6p per share, to be paid in four equal instalments. 

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. On the upside, an historic and forecast dividend yield of over 7% is hard to ignore, especially in the current ultra-low interest rate environment.

Evidence of growing new category sales continues to be seen. While ethical issues must now be weighed against the group’s climate change initiatives. In all, and given a discounted valuation, strong cash generation and a generous dividend yield, analyst consensus opinion continues to point towards a ‘strong buy.’

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