Despite the challenging trading environment and lower sales, the tobacco giant has showed good defensive characteristics.
British American Tobacco announces steady results
- Developed markets trading remained resilient, however coronavirus has pronounced impact in emerging markets, particularly Bangladesh, Vietnam and Malaysia
- Management estimate a full year hit to revenues of 3% from the crisis and has reduced full year sales growth guidance to 1-3% from 3-5%
- Sales of New Products, including e-cigarettes, will slow down and management has pushed back the targeted £5bn of sales to 2025 from 2023/24
- Recommendation: While there are longer term structural challenges for tobacco groups, we maintain our medium risk Hold recommendation
In this morning’s pre-close trading update, British American Tobacco suggested it was performing well against a challenging trading environment since the start of the year. However, the crisis and shutdowns could have a more pronounced impact for the remainder of the year, as lockdowns and lower travel volumes impact on duty free sales. Certain countries, such as South Africa, still haven’t lifted bans on tobacco sales during the outbreak.
The downgrade of sales projections for this year and its e-cigarette business is naturally disappointing, leaving the shares to react by falling off by up to 4% at the open this morning. However, in this time of crisis, the shares are doing what they are supposed to for a tobacco company: displaying defensive characteristics. Investors will be given some reassurance over the fact that management is not just yet planning on cutting the dividend and maintained their 65% pay-out ratio, while there will be a focus on cost and debt reduction.
While there are longer term structural challenges for tobacco groups, such as health concerns and regulation, for the time being investors will take some reassurances from this trading update that the shares can make a positive contribution to a balanced portfolio in terms of a high dividend yield with defensive characteristics.
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