Whenever I write about the British American Tobacco (LSE:BATS) share price, I usually conclude by saying that alternatives to traditional cigarettes are likely to be less profitable and that, over the long term, the group’s earnings — and therefore its dividend — are likely to decline. Against this backdrop, its share price is probably going to suffer.
But there’s no sign of this yet. Since November 2024, it’s up 43%. Compared to November 2023, it’s risen 63%. And the group’s dividend continues to grow. In 2024, it was 12% higher than it was four years earlier.
Crunching the numbers
However, a look at the company’s last three annual accounts, shows a clear trend.
Comparing 2024 with 2022, combustibles revenue is down 10% but the income from the sale of alternatives is up nearly 19%. Over the same period, earnings per share have fallen 2.4%.
Similarly, the net cash generated from operating activities fell from £10.4bn in 2022 to £10.1bn in 2024.
Although these are relatively minor changes, to maintain its reputation as one of the highest-yielding stocks on the FTSE 100, the group’s having to run faster to stand still. In 2024, it returned 66.3% of earnings to its shareholders by way of dividends. In 2022, the figure was 62.2%.
Impressively, if there are no surprises over the next few months, the group will be able to boast of 27 consecutive years of dividend growth.
Strong cash flows have enabled it to improve its balance sheet in recent years. Adjusted net debt to adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) was 2.4 at the end of 2024. At 31 December 2020, the ratio was 3.3.
These figures exclude its business in Canada, which is involved in a long-running legal dispute. The group made a £6.2bn provision in its 2024 accounts to reflect the anticipated cost of settlement in the country.
As a measure of profitability, the group only started reporting its gross margin in 2024. And while it shows that I’m correct in thinking new products are less profitable, the gap is closing.
| Gross profit margin by product category | 2024 (%) | 2023 (%) |
|---|---|---|
| New categories | 55.7 | 50.6 |
| Combustibles | 69.3 | 69.1 |
| Traditional oral | 82.2 | 80.6 |
| Other | 38.9 | 37.2 |
| Overall | 67.2 | 66.6 |
Despite the World Health Organization calling for a ban on flavoured e-cigarettes as well as further restrictions on the advertising of non-combustibles — and younger people appearing to be more health conscious than their parents — British American Tobacco remains hugely cash generative.
That’s how it can pay such a generous dividend and probably explains why its share price is able to outperform the wider market. As I write late on 19 November, the stock’s yielding 5.7%. The FTSE 100 as a whole is currently offering a return of 3.3%.
And although I believe there’s uncertainty over the future of the industry, there doesn’t appear to be any immediate reason for shareholders to panic.
A final thought
But there’s an old adage that if you say something often enough, you’ll eventually be proved right.
I’m therefore going to end by saying (once again) that alternatives to traditional cigarettes are likely to be less profitable and that, over the long term, the group’s earnings — and therefore its dividend — are likely to decline. Against this backdrop, its share price is probably going to suffer!
On this basis, I think there are better alternatives to consider elsewhere.
