Ignoring the effect of exchange rates, British American Tobacco 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.
View the latest BATS share price and how to deal
Our view
Global tobacco consumption has been in decline for decades. This trend looks set to continue. However, BATS is a juggernaut, and market forecasts expect revenue to continue to inch towards the £30bn mark over the next couple of years.
That scale combined with incredible pricing power has resulted in operating margins other consumer goods companies can only dream of. And, with relatively low capital requirements, the group's delivered prodigious amounts of cash despite falling volumes.
Much of that cash is currently tied up in stabilising the balance sheet, and debt reduction is becoming a bigger priority for management. That's behind the decision to pause the share buyback programme, which has dampened investor sentiment. BATS' cash flows still leave room for dividends, and the track record here is formidable. Remember though, no returns are ever guaranteed.
BATS is notable for its significant emerging market exposure, and has been enjoying top line growth in all markets except the US. But it also has a strong position in the US which is by far its biggest market, and there's lots of potential here. So far BATS has been able to push up prices, launch new products and grow margins. But with US smokers starting to focus on value, profit growth may become more challenging in 2023.
BATS' New categories like vapes and heated tobacco are growing very quickly. The division is loss making, but those are reining in and profits are expected to start in 2024.
One risk to these products' success is the prospect of further regulatory restrictions. And whilst there is evidence to suggest vaping is less harmful than smoking, it is not risk-free. Vaping has not been around for long enough to know the risks of long-term use, and the emergence of negative data could also throw a spanner in the works.
Looming regulatory risk and the core business being propped up by a declining industry explains BATS' valuation, which is significantly below its longer-term average. The other important thing to consider with tobacco stocks is that many institutional investors can't, or won't, invest in the sector. That can keep a lid on demand, and therefore valuation.
A key attraction for investors is likely to be the 8.1% yield, one of the highest in the FTSE 100. Analyst forecasts suggest this year's dividend payments are 1.6 times covered by free cash flow which provides some comfort that the yield is sustainable. We stress however, that no dividends can ever be guaranteed. For investors looking for more blue sky potential BATS is one of the more exciting names in new categories of tobacco products, but whilst that part of the business is still loss making, we would urge caution.
BATS key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind 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 Refinitiv. 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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