British American Tobacco: Slow And Steady Progress Likely

Core Viewpoint - British American Tobacco (BAT) has underperformed compared to the S&P 500 Consumer Staples Index, with a year-to-date increase of less than 2% against the index's 7.1% rise, and a significant 27% price decline in 2023 [2][3] Financial Performance - BAT's revenue growth for 2023 was in line with guidance, particularly driven by strong performance in new categories, which contributed to operating profits two years ahead of schedule, enhancing the operating margin to 45.7% [3][4] - The share of new categories in revenue increased by 1.8 percentage points to 12.3%, although still trailing behind Philip Morris, which has 39% from smoke-free products [4] Dividend and Valuation - The forward dividend yield is robust at 9.8%, with a current yield of 9.6%, indicating strong returns for investors [5] - The forward non-GAAP price-to-earnings (P/E) ratio stands at 6.6x, significantly lower than its five-year average of 8.7x, making it attractive compared to peers [6] Market Position and Growth Drivers - BAT's vape brand Vuse has improved its market penetration to 41% in key markets, up from 36% in 2023, indicating strong growth potential [7][8] - Velo, BAT's modern oral brand, has also seen an increase in market share, reaching 10.3% in key markets, up from 8.6% in 2023 [8] Regulatory Challenges - The US market, accounting for approximately 44% of BAT's revenue, poses significant challenges, including a 90 basis points decline in Vuse's value share due to the rise of illicit single-use vapes [9][10] - Regulatory actions, such as marketing denial orders from the US FDA, have impacted sales of popular products like Vuse Alto, complicating the transition to non-smokeable products [10] Future Outlook - BAT anticipates growth in new categories to be weighted towards the second half of the year, with expectations of low-single figure organic constant currency revenue growth for the full year [11] - Despite ongoing regulatory challenges, BAT's strong adjusted profit margins and attractive dividend yield support a positive outlook for the stock [11]