British American Tobacco: Called The Surge, Staying Invested

Core Viewpoint - British American Tobacco (BTI) has shown strong performance relative to the S&P 500, but fundamental challenges in the tobacco industry raise questions about the sustainability of this performance [1][2][27] Recent Performance - BTI has outperformed the SPY ETF since the beginning of the year, but its performance is in line with peers, indicating broader industry trends [2] - Year-over-year revenue growth has declined for BTI and its peers, including Altria and Imperial Brands, highlighting systematic headwinds in the tobacco sector [3][4] Financial Performance - BTI reported an 8.2% year-over-year decrease in half-year revenue, primarily due to the divestiture of its Russian and Belarus segments, with core revenue declining only 0.2% [5] - The company's organic revenue was impacted by pricing challenges, which are seen as a broader economic issue rather than specific to BTI [6] - BTI's operating profit margin was 34.5% in H1, indicating robust profitability despite challenges [11] Segment Performance - The "new categories" segment now accounts for approximately 17.9% of BTI's revenue mix, showing strong year-over-year growth and potential for future expansion [9] - Combustible product sales struggled in H1, with volumes remaining stable but pricing pressures affecting revenue [8] Investment and Valuation - BTI's forward dividend yield is around 8.18%, higher than its peers, and the company has a history of consistent dividend payments [23][24] - A peer-based analysis shows BTI's valuation metrics are low, with a forward price-to-earnings-growth ratio of 1.89x, indicating compelling bottom-line value [19][20] Future Outlook - BTI plans to increase its stake in a Canadian cannabis producer, which could provide diversification and growth opportunities [10] - The company is expected to maintain a low debt-to-EBITDA ratio, allowing for potential reinvestment in new product categories [15]