British American Tobacco British American Tobacco PLC (LSE) has unveiled a bumper share buyback programme worth £2bn. Like a number of other large UK companies, including Shell and Unilever, the tobacco company is returning cash to shareholders by buying up its own shares, thereby boosting the share price by reducing the supply.

Shares in BAT rose 3% to 3368.5p on Friday. Despite the benefits for investors, when companies return large amounts of cash to shareholders, analysts sometimes complain that this is a sign that they have run out of ideas. “You worry that buybacks are just a screen for a lack of strategy,” said Neil Wilson, an analyst at Markets.com. “Investors want to see more of a deliberate attempt to unlock value.”

However, tobacco companies typically generate lots of cash and BAT is seeing growth from its non-combustible products or e-cigarettes.

ESG concerns over tobacco investments

Tobacco is obviously an unpopular sector with ESG (Environmental Social Governance) investors, meaning some funds are unable to buy the shares. Yet the company now claims it is now putting the environment and sustainability front and centre of its business.

“Putting ESG at the heart of our strategy and corporate purpose is delivering sustainable growth, encouraging more consumers to transition to reduced risk products and reducing the health impact of our business,” said chief executive Jack Bowles in BAT’s full-year results statement last week. “We are also on track to achieve our other ESG targets, including carbon neutrality from our operations by 2030.”

British American Tobacco has even trademarked the phrase ‘A Better Tomorrow’ in relation to its non-combustible or vaping products.

Is the tobacco sector lighting up again?

While the light may be going out of the cigarettes market, the company is seeing growth in its new product categories. BATs saw 50% growth in its non-combustible - or vaping - market last year and expects the category to bring in £5bn of annual sales by 2025. The company reached 18.3m e-cigarettes customers in 2021, an increase of 4.8m, and aims to have 30m customers by 2030. Adjusted revenues in the category rose 50% last year to £2bn, however the business remains loss-making, with losses down 9% to £100m for the full-year.

Total adjusted revenues increased by 6.9% to £25.7bn, with 4% revenue growth in tobacco sales, driven by a strong performance in emerging markets. Global tobacco industry volumes are expected to decline by 2.5% in 2022. However, the company expects to generate £40bn of free cash flow before dividends over the next five years, with cash conversion – the rate at which profits are converted into cash – in excess of 90%.

Are BAT’s shares enjoying a revival?

Despite BAT’s hopes, some analysts doubt that tobacco shares will ever make it into socially responsible investment portfolios. “Tobacco - even without combustion - [is] still too difficult to explain to fund investors,” Panmure analyst Rae Maile said in a recent note.

Meanwhile, US regulators have been cracking down on vaping due to concerns over lung disease, although the NHS advises that e-cigarettes are less harmful and that using them can help smokers quit.

Still, the shares are enjoying something of a comeback - up 25% this year to 3368.5p, and up 33% from 2530p in August. Besides the company’s success in vaping, the rise is also most likely due to the fact tobacco shares are a good hedge against inflation. Their customers are likely to continue smoking, no matter the price hikes or pressure on their pockets.

Back in March 2017 BATS shares hit 5530p – in the last 10 years they have never closed the day past this figure. While it’s unlikely the shares might revisit those levels any time soon, they are worth buying for the share buyback programme and current momentum in e-cigarettes. Analysts at Jefferies have set a price target of 3900p.

Go short and long with spread bets, CFDs and share dealing on 16,000+ shares with the UK’s No.1 platform.* Learn more about trading shares with us, or open an account to get started today.
* Best trading platform as awarded at the ADVFN International Financial Awards 2021

IG Analyst
15 February 2022