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Why British American Tobacco is up more than a quarter in two months
During the last two months shares in British American Tobacco (BATS) are up by 26.5%.
There are two very different reasons for this share price surge. The first is the changing macro-economic environment. Rampant inflation has resulted in a succession of UK interest rate rises, and expectations that American will follow suit imminently.
This has caused a rotation out of expensive growth stocks and into value. British American Tobacco, which is a high yield stock and is considered to be defensive in nature, has undoubtedly benefited from this process.
However, on a fundamental basis, investors have acknowledged that British American Tobacco has started to deliver on earlier promises.
Recent results (11 Feb) highlighted how the new categories business witnessed revenue growth of 51%, with the number of consumers of non-combustible products increasing by 4.8 million to 18.3 million.
The group has also initiated a £2 billion share buyback programme in 2022, as net debt to earnings before interest, tax, depreciation and amortisation has come down to below three times. The recently announced full year dividend was covered 1.65 times by free cash flow, the highest level of cover in more than a decade.
The group’s transformation strategy has been focused on three categories: vapour, tobacco heating and modern oral. These next generation products now account for 12% of group revenue compared with just 4% five years ago.
Vuse is now the number one global vaping brand with a value share of 34%. In the US it delivered strong revenue and market share growth. In the second half of 2021, Vuse became profitable at the category contribution level for the first time.
Glo is the group’s flagship tobacco heating product and comprises a battery powered device that heats tobacco sticks to 240 degrees celsius.
Glo has achieved 18% volume share of the tobacco heated product in its key markets.
Management forecast that the positive performance from new categories will continue and emphasised it is on target to reach £5 billion of revenue and maiden profitability for this part of the group by 2025.
Over the next five years British American Tobacco is targeting £40 billion of free cash flow before dividends. The group is committed to growing the dividend, however the improved capital position provides the group with the flexibility to engage in bolt-on acquisitions or make further share buybacks.