BATS took a robust approach to pricing its combustible products in the first half, which saw its market share decline by 0.2 percentage points in its key territories. Across the industry, cigarette volumes are now expected to drop by about 2.5% this year, up from the 2.0% decline previously expected.
New Category sales growth expectations have been upgraded from low double digits to the mid-teens.
However, group guidance for full-year growth remains at the low end of medium-term targets. Those are 3-5% for revenue and 4-6% for underlying operating profit.
BATS remains on track to reduce debt levels to 2-2.5x underlying cash profit (EBITDA) by the year-end.
The shares were down 3.3% in early trading.
Our view
British American Tobacco’s (BATS) New Category sales enjoyed strong momentum in the first half. A recent regulatory shake-up in the US could provide a further boost yet for smokeless products such as vapes and nicotine pouches.
However, the traditional tobacco market, which remains the company’s core profit engine, has seen continued volume declines and intense competition. The company has strong branding and enviable pricing power on its side, but performance will need to pick up in the second half just to hit this year’s modest guidance. Taken together, that was enough to hold management back from upgrading the outlook, and markets were a little disappointed on the day.
The group was early to recognise changes in consumer behaviour and is increasingly pinning its hopes for the future on its portfolio of 'smokeless' products, namely vapes, heated tobacco and oral pouches
There is some evidence to suggest that these products pose a reduced health risk compared to cigarettes, but they are coming under increasing scrutiny. For now, the regulatory tide appears to be moving in BATS’ favour, but the landscape is changing constantly, and not all decisions are likely to go the company’s way.
It's too early to call how the long-term profitability of these products will compare to traditional products. This could undermine BATS' attractive underlying operating margins, which have remained over 40% despite market challenges and higher inflation rates seen in recent years.
Consistently high cash flows do mean that the company is well-placed to make the investments necessary to keep pivoting away from cigarettes. That also supports a forward dividend yield of around 5.5%. The group also remains committed to ‘sustainable’ share buybacks.
However, it’s struggling to keep pace with distribution levels amongst some of its better-capitalised rivals. With net debt levels last reported on the wrong side of the 2-2.5x underlying cash profit (EBITDA) target range, there’s a risk that payouts to shareholders get sidelined if balance sheet improvements aren’t delivered within the promised timelines. There can never be any guarantees.
The improving outlook for BATS over the course of last year has been reflected in an uplift to investor sentiment. That’s left the valuation looking a little stretched, adding extra pressure for growth to rise towards the upper end of the company’s targets. Macroeconomic uncertainty and persistently high regulatory risk in the sector mean that this is by no means a given.
Environmental, social and governance (ESG) risk
The food and beverage industry tends to be medium-risk in terms of ESG, although some segments like agriculture, tobacco and spirits fall into the high-risk category. Product governance is a key risk industry-wide, especially in areas with strict quality and safety requirements. Labour relations and supply chain management are also industry-wide risks, with other issues varying by sub-sector.
According to Sustainalytics, BATS' overall management of ESG issues is strong. But we do have some concerns. The company has been consistently embroiled in tax and business ethics controversies. With tobacco being on the exclusion list of certain institutional investors, product impact is key and leaves the company open to penalties such as the £6.2bn incurred for Canadian healthcare settlements in 2025.
British American Tobacco key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember that yields are variable and not a reliable indicator of future income. Keep in mind that key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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