British American Tobacco: A Strong Message From The King

Core Viewpoint - British American Tobacco (BTI) remains fundamentally sound despite recent challenges, with a strong dividend yield and potential for growth driven by improved macroeconomic conditions and successful business strategies [4][6][9]. Financial Performance - BTI's total revenue decreased by 0.8%, while adjusted profit from operations declined by approximately 5%. However, earnings per share (EPS) increased by 1.3% due to lower net financing costs and a reduced share count from share buybacks [11]. - The company managed to expand its margins by 100 basis points during H1, 2024, despite a declining top-line, aided by efficiency gains and strong contributions from new category segments [11]. Market Dynamics - The macroeconomic outlook is improving, with lower financing costs expected to enhance consumer demand for BTI's products. Recent data indicates a decrease in inflation and a potential Federal Reserve interest rate cut by the end of the year [6][7]. - BTI added 1.4 million smokeless consumers, contributing 18% to group revenue and generating an incremental GBP 165 million in cash flow. The contribution margin from new categories expanded by 10% [11]. Future Outlook - Management anticipates organic revenue growth of 3% to 5% and mid-single-digit adjusted profit from operations growth on an organic constant currency basis by 2026 [11]. - The company aims to achieve a leverage ratio of 2-2.5x adjusted net debt to adjusted EBITDA by the end of 2024, indicating a focus on optimizing the balance sheet and reducing financial risk [8][11].