British American Tobacco: Disappointing Investor Day

Company Update (BATS LN) (Buy): Problems were on full display; shares have fallen back to a 7x P/E and 9% Dividend Yield

Highlights

• Mid-term Combustible revenue growth now expected to be 0-2%.

• Its Heated Tobacco efforts have stalled and it is rebooting its offering.

• Help on U.S. Vapour from U.S. state laws may be slow and modest.

• Buybacks seem likely to be limited until 2026, partly due to Canada.

• We continue to be disappointed by BAT’s poor management culture.

Introduction

British American Tobacco ("BAT") held its investor day last week (October 16). Its London-listed shares (“BATS”) have fallen by 3.3% in the days that followed, which means they are now down 11% from the peak in September:

BAT Share Price Performance (Last 1 Year)

NB. GBP/USD has risen by ~7% in the past year. Source: Google Finance (25-Oct-24).

We follow BAT closely because it has been a small position in our “Select 15” model portfolio since September 2023 and more importantly, because it competes with Philip Morris, part of our model portfolio since inception and a top-5 position since September 2023. We originally upgraded our rating on BAT to Buy in March 2020.

BAT has been a “value” investment, where we believe a single-digit P/E (currently 7.0x 2023 EPS) and high-single-digit Dividend Yield (currently 8.9%) would ensure a good return for investors even if the business were to perform poorly. BAT has significant structural and cultural problems, and we believe these were again on full display at the investor day.

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