Despite an upbeat first-half trading update Tuesday (2 June), British American Tobacco (LSE: BATS) shares fell over 3% in morning trading.
The standout is a hike in revenue outlook for the company’s smokeless products. Management says it now expects “mid-teens revenue growth for H1 and FY 2026.” That’s not a huge rise from previous guidance for low-double-digit growth, but it marks a definite uptick in the trend. So why did the shares fall?
Tobacco sales
The main problem I see is that global cigarette volumes are expected to decline around 2.5% for the full year. That’s worse than the 2% previously predicted. And it takes the shine off things a bit.
We are making good progress towards our year‑end target leverage range of 2.0-2.5x and remain committed to delivering sustainable shareholder value through robust cash returns.
— CEO Tadeu Marroco
The board still expects the year to bring a 5%–8% rise in adjusted earnings per share. And we could be seeing an operating cash flow conversion rate of more than 95%. The company says that should help in “maintaining a progressive dividend and sustainable share buybacks, with £1.3bn in 2026.“
Long-term dividends
British American Tobacco shares have had a strong five years, up 61%. It’s been a volatile few years, mind. But for me, there’s one key attraction — dividends.
We’re looking at a forecast 5.7% dividend yield for 2026. There are bigger FTSE 100 yields to aim for right now, for sure. But the company has raised its annual dividend for 30 consecutive years. And forecasts show it continuing for at least the next three.
Cover by earnings looks like running at around 1.3 times, and that might be a cause for concern. There seems to be plenty of cash flow at the moment. But if margins should be squeezed by falling cigarette sales and net debt should rise (it reached $30.4bn at 31 December 2025) might we see pressure on the dividend?
Crunch coming?
My main concern is over the pivot that British American is in the middle of. That’s away from all that increasingly unpopular smoke inhalation and towards ‘New Generation’ alternatives.
The shift does seem to be progressing nicely. And judging by this latest update, it might even be accelerating.
The trouble is, smokeless products still contributed only 18.2% of 2025 revenue. And the increase from 2024 — of 70 basis points — seems closer to the pace of a snail than a speedboat.
Also important, governments are increasingly trying to get people off vaping too and away from tobacco consumption altogether.
All about the dividend
I fear anything that prevents the dividend being lifted one year could result in a quick share price decline.
Saying that, I expect the board to maintain its focus on paying those dividends. And I think it should be able to keep them going for a good few years to come. This still has to be one for dividend investors to consider — but it’s mainly ethical considerations keeping me away.
Should you invest £5,000 in British American Tobacco P.l.c. right now?
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Alan Oscroft does not hold any positions in the companies mentioned.
