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British American Tobacco is a cash machine

by LLB Reporter
11th Feb 22 11:10 am

It previously looked like British American Tobacco was firmly out in the cold with the market but a recent shift in investor preference towards value stocks and an improved operational performance from the company has lit up the stock once more.

Obituaries for the tobacco sector have been written before and some high profile fund managers made their bones in the 1990s by going against the grain and investing in the space, making a lot of money from a subsequent smoking run for cigarette stocks.

However, will any reprieve be temporary this time? The shift in regulation, consumer habits and the increasing importance of ethics in investing all count against the sector.

“For anyone prepared to put aside moral considerations there was plenty to celebrate in British American Tobacco’s full year results,” says AJ Bell’s Russ Mould.

“The best free cash flow cover for its dividend in more than a decade, a big reduction in net debt, increased dividends and a new share buyback all served to illustrate how cash generative the company remains.

“It is also a business with pricing power; the addictive qualities of its product mean people will continue to buy cigarettes even if prices are hiked. This makes British American Tobacco better placed than some when it comes to seeing off the challenge posed by inflation.

“To really convince the market it has a viable long-term future British American Tobacco needs to show it is moving with the times and, after something of a false start, it appears the company’s New Categories business – selling vaping and e-cigarette products – is finally gaining some traction.

“Revenue for this part of the group is growing rapidly, a trend forecast to continue in 2022, though the unit is expected to remain loss-making until 2025.

“Perhaps British American Tobacco might be tempted to go down the route of renaming itself, as its UK-listed peer Imperial Brands did in losing the Tobacco moniker, somewhat disingenuously, in 2016. British American Blend anyone?”

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