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Analysis of British American Tobacco: Where does the tobacco giant stand?

Do Kwik
2. 4. 2023
4 min read

A segment that has been with us almost since time immemorial and may very well be with us for a long time to come. Moreover, it is based on the fact that it creates addiction in people. It is, after all, a brilliant business model. How can this company take advantage of that?

British American Tobacco $BTI+2.3% is an international tobacco company based in London, one of the largest tobacco companies in the world.

BTI focuses on developing low-risk categories such as e-cigarettes and snus. In 2020, this category accounted for 6.1% of the company's revenue. BAT also invests in research and development of new products and technologies to remain competitive in the market.

The company has good numbers, but the tobacco industry is heavily regulated and BTI has to deal with risks associated with regulation, such as higher tobacco taxes and advertising bans. The company also faces increasing pressure to regulate e-cigarettes and snus. BTI seeks to improve its environmental, social and governmental responsibility performance. The company has committed to a goal of reducing greenhouse gas emissions by 30% by 2025 and is undertaking projects to improve working conditions and employee health.

Last six months zero from zero

Risks

Like any company, British American Tobacco $BTI+2.3% is exposed to various risks that could affect its performance and share value.

Regulatory risks: the tobacco industry is heavily regulated and faces the regulatory risks I write about above.

Health Risks: Building on the previous point, the tobacco industry is faced with a growing awareness of the health risks associated with tobacco smoking and BTI must seek to minimise these risks through innovation and development of low risk categories.

Economic risks: BTI is exposed to economic risks such as volatile raw material prices, changes in exchange rates and changes in trading conditions.

Competition: The tobacco industry is very competitive and BTI has to deal with competition from other tobacco companies such as Philip Morris $PM-0.2%, Altria, International, Japan Tobacco International and Imperial Brands.

https://www.youtube.com/watch?v=NOqhAbwZiaQ

Reputation: BTI faces reputational risks associated with the tobacco industry, such as concerns about the impact of smoking on health and social responsibility. Possibly problems with some of their products.

Dividend

Everyone likes to see a high yield. But it doesn't really matter if the payout is not sustainable. Next year, earnings per share are expected to rise 48.6%. Assuming the dividend continues its recent trends, it looks like the payout ratio could reach 54% next year, which is pretty much sustainable.
While the company has been paying a dividend for a long time, it has cut it at least once in the last 10 years. Since 2013, the dividend has increased from £1.26 a year to £2.31.

The dividend has been cut several times. Source

So it's a bit of a wild ride, but there are positives.

BTI is protected from the unprecedented rise in interest rates, but it is not immune.

The average cost of debt is 4%, which is below current market rates, so they expect the impact of higher rates to be reflected in net finance costs in 2023 and beyond. As a result, they also expect full year net finance costs to be approximately £1.9 billion in 2023.

In the meantime, BTI has demonstrated a solid performance in the new categories and management now expects to achieve profitability in this segment in 2024, a full year ahead of plan. This has been driven by robust year-on-year growth in new segments of 4.2 million customers to 22.5 million by the end of 2022.

EPS growth. Source

Personally, I don't like the company at all. The dividend is admittedly high and probably somewhat sustainable. But otherwise, it's a roller coaster ride and I consider the sector overall to be quite risky due to the various effects of regulations, restrictions and trends.

Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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