British American Tobacco: ~10% Dividend Yield for "Glass Half Full" Investors
Company Update (BATS LN) (Buy) The U.S. earnings algorithm is broken, but non-U.S. growth is holding up. 15% FCF Yield with buybacks likely to resume, potentially helped by ITC share sale.
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Highlights
U.S. revenues fell 4.5% organically as cigarette volume fell 11.3%
European cigarette markets seem stable, and BAT has EM growth
New Categories are a headwind; BAT lost share in multiple categories
We expect a flattish Net Income, but EPS growth driven by buybacks
At 2,480.2p, we see 78% total return (25.2% p.a.) by 2026YE. Buy
Introduction
British American Tobacco ("BAT") released 2023 results on Thursday (February 8). BAT shares in London finished Thursday up 7% but is down by nearly 2% on Friday morning, meaning they have fallen 19% in the past year:
BAT Share Price Performance (Last 1 Year)
Source: Google Finance (09-Feb-24).
We have had a Buy rating on BAT since March 2020 and added it to our “Select 15” model portfolio last September.
BAT reported a superficially stable P&L for 2023 but with the U.S. half facing problems. Excluding both currency and the exit from Russia/Belarus, Net Revenues grew 3.1% and Adjusted Profit from Operations (“PfO”) grew 3.9%. However, revenue growth included a 4.5% decline in the U.S. being offset by growth elsewhere, and PfO growth was similarly driven by non-U.S. businesses as well as help from cost cuts and one-offs.
In the U.S., BAT Combustibles revenues fell 6.4% organically after volume fell 11.3%; illicit e-vapor disposables have broken the Tobacco earnings algorithm. BAT’s Vapour business proved an insufficient offset, despite some revenue growth (on a 6.6% lower volume). BAT U.S. revenues fell 4.5% organically and its PfO was flattish, helped by cost cuts. Outside the U.S., BAT businesses did much better, though also helped by cost cuts and some one-offs.
The transition from cigarettes to New Categories is a moderate headwind for BAT, as it is losing moderate share when smokers move to heated tobacco and losing significant share when U.S. smokers move to nicotine pouches; BAT lost ground in both categories in 2023. It is leading in nicotine pouches in the Nordic, but this market is small and BAT’s lead is eroding. For now it is also losing revenues when U.S. smokers move to Vapour, owing to illicit disposables.
2024 outlook is for both organic revenue growth and ex-currency PfO growth to be low-single-digits. We believe this implies a flattish EPS. We believe buybacks will resume during 2024.