British American Tobacco – Dividend Up 6%. Further Industry Outperformance Expected

Updated on

Ignoring the effect of exchange rates, British American Tobacco PLC (LON:BATS) saw full year revenues rise by 2.3% to £26.3bn. A small decline in traditional combustible products was more than offset by an increase in sales from new categories such as vapes, which rose by 37.0% to £2.8bn.

Underlying operating profit was up by 4.3% to £12.4bn. This was at the top end of guidance, boosted by cost savings in excess of those originally targeted.

Free cash flow increased by 8.1% to £8bn. Net debt was up by 8.2% to £39.3bn, due in large part to foreign exchange movements. The Group intends to pay a dividend of 230.9p per share.

For 2023, BATS expects organic revenue growth of 3-5% against a forecasted 2% volume decline for the tobacco industry. This assumes the sale of the Russian and Belarus operations now expected to close in 2023.

The shares were down 4% in early trading.

British American Tobacco’s Sales

Derren Nathan, head of equity research at Hargreaves Lansdown

“In volume terms sales of BATS cigarettes were down 5.1%. It’s hard to tell how much of this came from smokers feeling the squeeze of rising prices, and how much came from a drive by smokers to become more healthy. BATS’ cigarette brands include the likes of Rothmans, Camel and Newport.

Despite the significant fall in volume of its biggest sales category, profits have done well. This has been helped by cost savings and strong pricing. Meanwhile new categories such as Vuse vapes, are performing very strongly, and are expected to reach profitability in 2024, one year ahead of plan.

Another year of 100% cash conversion underpins the 8% dividend yield as well as investment in new categories but we note the statement of intent around  debt repayment, with improved balance sheet strength now a priority. In the short term we see further approvals of US pre-market tobacco product applications (PMTAs) for new categories as pivotal to investor sentiment.”