Shares in British American Tobacco (LON:BATS) cheapened after the company warned FY26 global cigarette industry volume is expected to be down around 2.5%.
That guidance was worse than the previously expected 2% decline. It also means BATS’ FY26 sales and profit growth will be at the lower end of the company’s medium-term guidance ranges.
Investors were also unnerved by the outlook for heated tobacco, where BATS expects a low double-digit sales decline for H1 and the full year. This reflect competition and inventory movements in Japan.
Showing resilience
Mildly disappointing FY26 guidance overshadowed an otherwise solid H1 update from the Dunhill, Pall Mall and Lucky Strike seller. The FTSE 100 company called out ‘continued US delivery’ in H1. BATS also said revenue growth in its new categories division accelerated, led by strong performances in its modern oral and vapour units.
BATS insisted its Velo oral nicotine brand continued to deliver ‘excellent’ revenue and category‑contribution growth globally. In the US, performance is expected to be skewed to H1 as BATS laps a stronger H2 comparator. But a US crackdown on the sale of illegal vapes is benefiting its branded products.
Looking ahead, BATS reiterated confidence in its medium-term revenue growth target of 3% to 5% and its EPS growth target of 5% to 8%. However, FY26 performance is expected to come in at the lower end of these ranges.
Monitoring developments
CEO Tadeu Marroco said: ‘In new categories, revenue growth is accelerating and we now expect to deliver mid-teens for 2026. We continue to prioritise investment in our most profitable value pools, driving strong contribution growth.’
Marroco said BATS is ‘closely monitoring’ developments in the Middle East.
‘While there is no significant impact on the group at this time, the broader macroeconomic and geopolitical backdrop is dynamic, increasing the risk of volatility in consumer sentiment should uncertainty persist.
‘We are making good progress towards our year‑end target leverage range of 2 to 2.5 times and remain committed to delivering sustainable shareholder value through robust cash returns.’
A share price pullback has created a good entry point at the world’s third-largest tobacco company by volume.
While fewer people are smoking, BATS’ products are highly addictive. This lends BATS considerable pricing power and makes the company a classic consumer defensive. Strong cash generation should support BATS’ progressive dividend policy and £1.3 billion of share buybacks in FY26 alone.
That said, there is a risk of near-term earnings downgrades given the deteriorating global cigarette volume outlook. BATS cautioned that profits are expected to be H2 weighted this year, as cost savings are realised and the performance in APMEA stabilises. That means a lot needs to go right in H2 for the company to meet FY26 guidance.
Read the press release here:
https://www.bat.com/investors-and-reporting
