British American Tobacco (LSE: BATS) just posted a nice rise in half-year profits, and its shares responded with an early 3% rise.
We’re still looking at a 35% fall over five years though, after a big slide in the past 12 months. Let’s see how the first half went.
Strong half
New chief executive Tadeu Marroco, who’s only been in the job for 10 weeks, said: “It is a challenging external environment. High inflation and slower global growth are impacting consumers and business. Yet our revenue, profit from operations and earnings are all up.“
Call me a cynic. But when people are under pressure and worried about their finances, isn’t that exactly the time they’ll reach for a ciggy to try to soothe the stress a bit?
Whatever the reason, its product is selling well.
Using adjusted figures, we saw a 2.6% rise in revenue, with profit from operations up 3.6%, and earnings per share up 5.3%.
Outlook fine
Those are modest gains. But they look pretty good for a business that many think is in terminal decline.
Saying that, I do think that cigarettes are doomed to eventual extinction. I doubt it will be any time soon, but it weighs on British American Tobacco shares, for sure.
With that in mind, what is it that most impresses me in these latest figures? I’ll tell you. It’s a 27% rise in revenue from new category products.
New directions
There are ever new ways of getting a tobacco hit other than setting fire to it, and that has to be where the future lies. And I think it’s where British American has the edge over some of its rivals.
These new things only contributed £1.7bn out of a total revenue of £13.4bn this time. But it’s going the right way, and I can only see stronger growth in the years ahead.
The CEO said: “I remain confident that New Categories will deliver a positive contribution in 2024. However, we do not expect contribution growth to be linear, as levels of investment will align with the phasing of our big innovation platforms.”
What about cash?
British American seems to be one of the best cash cows in the FTSE 100, but cash generation dipped a bit in this half. With a cash conversion rate of 72% though, I’m not too worried.
However, I am a bit concerned about debt. Adjusted net debt at 30 June stood at £37.5bn. I don’t see any problem servicing it, mind. But I want to keep an eye on it.
Time to buy?
With a dividend yield of 8.7%, well covered by earnings, British American does look like it could be one of the FTSE 100‘s best buys to me.
The clear risk is that the tobacco industry could eventually disappear. And though these new categories of products are on the rise, governments look nervous about things that can create addicts the way tobacco does.
Those are the two key things an investor needs to balance, I’d say.
