High US exposure raises uncertainty for BAT

A focus on next generation products saw a big rise in revenue last year in the battle against declining tobacco volumes.

Article updated: 1 April 2019 9:00am Author: Ian Forrest

  • Stock viewed as a ‘hold’ for medium risk investors due to strong dividends and new generation of products which provides some scope for optimism with a 95% rise in revenues last year.
  •  Reliance on US revenues raises doubts due to tightening FDA regulation.
  •  New era for BAT as new CEO takes the helm allowing a fresh look at the current strategy.

Tobacco Pipe

Jack Bowles takes over as CEO of British American Tobacco today from Nicandro Durante. The handover should be relatively smooth as he is currently chief operating officer and has been with the company since 2004. He takes the reins at a very interesting time for BAT as it addresses the challenge of declining tobacco volumes in developed markets and looks to rapidly build up its next generation of products. Last year the company saw a 95% rise in revenue in that area to £901m and is targeting £5bn by 2023/24.

For many investors the main appeal of BAT is the strong dividend payments and Bowles will understand how vital it is to maintain a good level of cash flow in order to ensure that those quarterly returns continue the long record of growth. However, Bowles will also take on the challenge of reshaping the company, especially in the US where the FDA is determined to reduce nicotine addiction and the marketing of e-cigarettes to children. For investors, the departure of Durante and finance director Ben Stevens who is also due to retire shortly, is a positive as it should enable a fresh look at the strategy.

Our View on British American Tobacco - Hold

While the relatively high dividends are clearly appealing to income-seekers the high proportion of BAT’s revenue that now come from the US have increased uncertainty around the stock. In our view the stock is no more than a ‘hold’ for medium risk investors.

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Ian Forrest

Investment Research Analyst

Ian’s background in investments, financial journalism and research has seen him advising private investors on equities and helping to manage portfolios. His qualifications include the Certificate in Financial Planning and the Chartered Institute for Securities & Investment’s Investment Advice Diploma.