Image source: British American Tobacco
British American Tobacco (LSE: BATS) shares plunged 8% in early morning trading (13 February) after the company posted mixed results for the year ending 31 December 2024.
The tobacco giant reported revenue of £25.87bn and an adjusted profit of 362.5p per share. The results slightly missed expectations for revenue of £26.11bn but exceeded the anticipated profit of 362.2p per share.
Overall profitability was impacted by a £6.2bn charge related to a long-standing lawsuit in Canada. The company expects further regulatory challenges in Bangladesh and Australia this year, affecting its combustible tobacco products. Despite these headwinds, CEO Tadeu Marroco reaffirmed his confidence in the company’s business strategy, forecasting modest revenue growth of about 1% towards the second half of 2025.
Additional challenges have arisen in the US. Consumers are frequently opting for cheaper alternative products, specifically illicit disposable vapes. However, British American highlighted a mild recovery in market share and positive developments in its nicotine pouch segment. The profitability of its next-gen products has also improved, with revenues surpassing expectations.
Chief financial officer Soraya Benchikh believes the company’s on track to meet its 2025 outlook of low-single-digit organic revenue and adjusted profit growth.
“We are committed to maximising sustainable value from our combustibles business while driving growth in our New Categories through innovation and premiumisation,” she said.
Dividend value
With an excellent track record of providing consistent dividends, it’s long been a favourite of British income investors. For decades, it’s maintained a significant market share and continues to expand its diverse product portfolio. The addition of next-gen products positions it well to achieve a meaningful share in the evolving nicotine market.
In recent years, the key attraction for the company is the dividends. While many other stocks maintain a similar yield of around 7%, it’s backed up by decades of growth and reliable payments. In previous years, the stock provided value through capital appreciation but that has changed since 2017.
The price has made little headway in the past five years, up only 1%. In the same period, the yield’s increased almost three-fold. For investors that prefer the consistency of dividend income, it’s clear to see the attraction.
Regulatory concerns
As ever, there are risks to investing in the stock. Regulatory changes remain the key challenge, as they have for years. The tobacco industry faces increasingly stringent restrictions around the world, all of which can impact sales and profitability.
Naturally, such regulations intend to decrease harmful tobacco use, an endeavor that British American recognises as necessary. This is reflected in its costly attempts to transition to next-gen products. Unfortunately, there’s no guarantee such a transition will ever be profitable and the company may continue to lose money.
On top of this, current and future legal cases related to health concerns and environmental issues continue to threaten its financial stability. Some would prefer to see tobacco deemed illegal but, historically, prohibition has seldom led to a sustainable solution.
Ironically, the company may be the one best positioned to reduce any harm it’s responsible for. For income investors positive about a transition to smokeless products, I think the dividend track record alone makes it a stock worth considering.
