British American Tobacco: Headwinds Gathering Since H1, But Cheap With 6%+ Dividend Yield

(Preview) Company Update (BATS LN) (Buy)

Summary

• British American Tobacco shares have stagnated in USD in the past few months, and are at 10.6x P/E and a 6.2% Dividend Yield.

• Things became cloudier since H1, when it achieved a mid-single digit EPS growth but with a much weaker U.S. Combustibles volume.

• Its Vapour business faces a rising threat from disposables in Europe, and lost a key patent case and nearly $100m to Altria in the U.S.

• It remains far behind in Heat Not Burn and U.S. Modern Oral, while Philip Morris may become a significant competitor in the U.S.

• With BAT shares at 3,509.0p, even on conservative forecasts we expect a total return of 47% (13.9% annualized) by 2025 year-end. Buy.

Introduction

We review recent developments on British American Tobacco (“BAT”) after shares have continued to stagnate in USD over the past few months and remained 13% lower than their peak in February.

We originally upgraded our rating on BAT to Buy in March 2020. Since then, shares have gained 58% (in GBP, including dividends) in just under …