Growing demand for vapes and heated tobacco helped to bolster revenue at British American Tobacco last year, as the company prepares for a future with lower cigarette sales and an emphasis on newer products.
Reported revenue from so-called non-combustible products grew more than 40 per cent year on year to £2 billion (€2.39 billion), BAT said on Friday, as the company reduced losses in the category by 9 per cent, the first time it has done so.
The UK-listed maker of Lucky Strike and Camel cigarettes said that its non-combustible division was on track to reach profitability by 2025, with expected revenues of £5 billion.
Jack Bowles, chief executive, said 2021 had been a “pivotal year” in BAT’s transformation and that the “strong foundations” from non-combustible growth would enable the company to deliver a £2 billion share buyback programme, its first since 2014.
BAT said group revenue contracted 0.4 per cent to £25.7 billion last year while profits rose 2.7 per cent to £10.2 billion, in line with analysts’ expectations.
The company predicted that global tobacco volumes would fall 2.5 per cent in 2022 but that sales of its non-combustible products would climb further.
Despite making large investments in reduced-risk products, tobacco companies remain highly cash-generative. BAT expects to deliver £40 billion of free cash flow before dividends over the next five years.
Underwhelmed
As a result, analysts were underwhelmed by the buyback programme, which was first mooted by BAT in December.
James Edwardes Jones, an analyst at RBC Capital Markets, said the results were “very satisfactory” but added that the size of the buyback fell short of expectations. “We had hoped for a little more: £2.5 billion to be precise.”
Rae Maile, an analyst at Panmure Gordon, wrote that the buyback was “probably the minimum which could have been delivered against expectations . . . [and] our overall feeling is the company has only just done enough”.
BAT’s share price was flat in early afternoon trade, having risen more than a fifth since December 7th, when Mr Bowles stated that a share buyback was likely.
He said on Friday that BAT would consider further shareholder returns in the years ahead: “We have the possibility between bolt-on merger and acquisitions, dividends, investment in the business and share buybacks . . . there’s time to review as we go along.”
Last year, BAT ventured into the cannabis industry by taking a 20 per cent stake in Canadian company Organigram, which produces marijuana for medical and recreational use.
Mr Bowles suggested further acquisitions could be needed to expand its move beyond nicotine. “There are lots of things you can do organically and it takes a long time or you jump-start yourself.” – Copyright The Financial Times Limited 2022
