No smokes without a mire. The grim impact of cigarettes on users’ health is forcing the likes of British American Tobacco to prepare for a future without them. On Tuesday, the maker of Lucky Strikes appointed Luciano Comin as its first director of “combustibles” as it now calls cigarettes. This could pave the way to jettisoning the cash-rich business.
BAT, in common with rivals, has long pursued a two-track model. It relies on the sinking ship of cigarettes to fund investment into the lifeboat of non-combustion nicotine products, including vapes. But years down the track, cigarettes still make up the lion’s share of its revenues, more than 83 per cent on 2022 Visible Alpha estimates, and all of its profits.
Meanwhile, cigarette sales are declining in the US. This is BAT’s largest market, contributing about half of sales and operating profits. Moreover, BAT is ceding market share to rivals there. Analysts forecast BAT’s US cigarette revenue will grow at an average compound rate of just 2.3 per cent through 2030, probably less than inflation.
Cigarettes should nevertheless continue financing a steep 7 per cent dividend yield, at least for the next few years. Lex values future payments on the conservative assumptions including long-term growth rates of just 1 per cent and long bond yields of about 3.3 per cent. We think BAT is worth about £33 per share today. That is 6 per cent higher than the market price.
This assumes non-combustibles will not make a serious contribution to cash flow until the latter part of this decade. BAT itself only expects break-even for its non-burning smokes and vapes sometime around 2025. On a standalone basis, its global cigarette business might today be worth £30 a share, even if those earnings do not grow at all.
In time, BAT may be able to split off its cigarettes business. The longer it takes, the nearer complete runoff will be and the lower the value of the business. Comin needs to ready combustibles for an independent future.
