BATS plans £2bn share buyback

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  • “New category” products continue to make losses
  • Rebound in cigarette sales in emerging markets

British American Tobacco (BATS) changes direction – or at least gives that impression. In its annual results, the cigarette giant said that ESG is now “at the heart of its strategy” and that it is succeeding in reducing the “health impact” of its activity.

His figures are less convincing. Traditional cigarettes still dominate BATS’ accounts, and emerging markets pushed fuel revenues up 4% at constant exchange rates. South Africa – which temporarily banned tobacco sales during the pandemic – saw particularly strong growth in cigarette volume, as did Pakistan, Bangladesh and Vietnam. In contrast, in 2021, just 12% of the group’s sales came from “non-combustibles”, such as vapes, tobacco heat sticks and nicotine patches, although this has increased by 4 percentage points since then. 2017.

In the longer term, however, demand for traditional tobacco products is expected to fall and BATS is keen to mitigate its decline. While the group’s ‘new category’ products are still losing around £100m, they are gaining in popularity. 18.3 million consumers purchased non-combustible products in 2021, compared to 13.5 million the previous year. Meanwhile, revenue from BAT’s new categories jumped 42% year-on-year to £2.1bn.

The company said its new categories have a “clear path to profitability by 2025”, funded – in true ESG style – by “the continued strong growth in fuels value”. In 2021, it further increased investment in the new category by £496m.

Beyond ESG concerns, BATS is a prodigious cash generator that generously rewards its shareholders. Alongside its annual results, the group announced a buyback program of up to £2bn of ordinary shares. The program will start on February 14 and end no later than December 31, 2022.

Dividends are also up. BATS has been increasing its payouts for over 20 years, and 2021 was no exception, with the dividend increasing by 1%. (The subsequent decline in the stock price suggests that investors were expecting a bigger upside). Meanwhile, the company expects to generate around £40bn of free cash flow over the next five years, suggesting investors will continue to reap rewards as it moves forward with non-fuels .

The strong cash conversion also allowed the group to reduce its net debt by 10% year-on-year. Net debt to adjusted EBITDA now stands at 3x, compared to 3.3x in 2020.

Ethical concerns will always be with BATS, regardless of its ESG claims. Even given age-old trends, income-seekers have a lot to gain, and with a forward price-to-earnings ratio of around 11, it’s cheaper than many of its tobacco rivals. Hold.

Last seen IC: Waiting, 2767p, July 28

BRITISH AMERICAN TOBACCO (BATS)
ORDER PRICE: 3280p MARKET VALUE: £75 billion
TO TOUCH: 3,279-3,281p TOP OF 12 MONTHS: 3,297p LOW: 2478p
DIVIDEND YIELD: 6.6% P/E RATIO: 11
NET ASSET VALUE: 2943p* NET DEBT: 55%
Year at December 31 Turnover (in billions of pounds sterling) Profit before tax (in billions of pounds sterling) Earnings per share (p) Dividend per share (p)
2017 20.3 29.6 1836 195
2018 24.5 8.35 264 203
2019 25.9 7.91 250 210.4
2020 25.8 8.67 280 215.6
2021 25.7 9.16 296 217.8
% cash -0.4 +6 +6 +1
Ex-div (1st of 4 payments): March 24
Payment (1st of 4 payments): May 04
*Includes intangible assets of £116 billion, or a share of 5,049 pa. NB: FY2021 dividend payable in four quarterly installments of 54.45 pa per share
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