British American Tobacco (NYSE:BTI) (LSE: BATS) stocks continue to trade at depressed levels. However, smart capital allocation practices of late, combined with stocks currently attached to a whopping 9.7% yield, should support his bullish argument. To be sure, Wall Street’s negative sentiment is not unfounded, as cigarette sales volumes continue to face pressure globally. Nonetheless, the progress made from non-combustible materials and a clear path to creating shareholder value makes for a promising case. So, I remain bullish on BTI stock.
Fuel sales continue to face intense pressure
Let’s start by addressing the most notable bearish factor in BTI’s investment case: the heavy pressure on fuels, whose sales volumes have been declining at an alarming rate of late. Of course, other factors are also pushing stocks lower, including high interest rates, regulatory risks, a general bearish sentiment affecting the UK stock market and many investors’ general aversion to stocks tobacco. Yet fuel challenges appear to be the most important catalyst.
In prepared remarks on the company’s first half 2024 results, management addressed this issue, mentioning that fuels industry volumes were down approximately 9% year-to-date and d ‘around 11%, excluding the discount brand market, where BTI is not present. We have recently seen such declines among some BTI peers, such as Altria (NYSE: MO) and Philip Morris (NYSE:PM) in their respective cigarette-based divisions, confirming the rather dire market conditions in this product category.
Nonetheless, BTI was once again able to more than offset these category-wide declines through pricing. Fuels generated £10.65 billion for BTI in the first six months of its financial year, up from £10.50 billion last year. Other wins in this area included strong results from the company’s Newport brand, which, along with market share gains from its Natural American Spirit brand, boosted its Premium segment volume share by 40 points. basis compared to last year.
Non-combustibles continue to progress
As BTI’s fuels division finds ways to survive and even thrive in a challenging industrial environment, its non-combustible products have shown signs of improvement across the board.
In Vapor, Vuse managed to maintain its global leadership with a value market share of 41.1%, despite a decline in the United States due to illicit vapes.
In heated products, Glo’s volume share has started to stabilize, down just 20 basis points year-to-date, compared to a 110-point decline in 2023.
In Modern Oral, Velo excelled, increasing BTI’s total oral volume share by 80 basis points to 10.3%. BTI held 65% of the Modern Oral category in AME (Americas excluding US and Europe), leveraging its position in established markets like Sweden and newer markets like the UK and Poland.
As a result, the company was able to increase revenues from this division to £2.16 billion, up from £2.10 billion last year.
Smart capital allocation and high returns seal the deal
Operations aside, BTI management appears to have made sound capital allocation decisions in an effort to address current investor concerns and improve shareholder value. In addition to the high yield of the stock, I am convinced that BTI’s investment arguments remain very attractive.
Notably, in March, BTI successfully completed the sale of a 3.5% stake in its stake in ITC (ITC is India’s largest publicly traded tobacco player), enabling the launch of a sustainable share buyback, including plans for £700m in 2024 and £900m in 2025. BTI is also using its own free cash flow to deleverage. Management expects the company to achieve its narrowed leverage target range of 2.0 to 2.5x adjusted net debt/adjusted EBITDA by year-end 2024.
In the meantime, shares remain committed to a high dividend yield of 9.7%. The dividend was increased again this year, with its current annualized rate sitting at £2.3552 (or about $2.79). It remains adequately covered by adjusted earnings per share (EPS), which is expected to reach £3.62 this year.
Such a high and well-hedged dividend yield should provide a notable margin of safety against further stock price losses in the near term. Additionally, BTI repurchases at current levels should prove highly accretive, as future dividend savings will be massive for shares repurchased at current levels.
Are British American Tobacco Stock a Buy, According to Analysts?
As for Wall Street’s opinion on the stock, BTI stock has a consensus rating of Moderate Buy based on five Buy ratings and three Hold ratings assigned over the past three months (in its listing in the United Kingdom, where the title is better covered). At 2,966.67p (around $38.09 at the current exchange rate), the British American Tobacco average share price target suggests an upside potential of 24.1%.
Takeaways
Although British American Tobacco is not immune to the challenges affecting the entire fuels sector, its brands continue to generate strong results. In addition, its Non-Combustibles division shows improvements across the board.
To top it all off, management seems to be decisive in improving the balance sheet and reward patient shareholders who have remained loyal to BTI, by showing a welcome mix of debt repayment and capital return. Considering all factors, BTI’s bullish scenario looks quite promising, which is why I remain a shareholder in the stock.
