British American Tobacco‘s (LSE:BATS) share price has surged 32% over the last year. To put this impressive gain into context, the broader FTSE 100‘s risen a more modest (if still impressive) 18% in value.
The reason for this outsized gain? Some of it is thanks to the tobacco stock’s natural defensive qualities, with revenues further supported by robust pricing actions and sales of non-combustibles. A hefty share buyback programme (£1.1bn in 2025 and a planned £1.3bn for this year) also boosted investor interest, as did further meaty dividend hikes.
But I wasn’t tempted to snap up British American Tobacco shares, and I’m still not interested today. The reason? I buy stocks to hold for the long term, and the outlook here is hugely uncertain as the world becomes increasingly ‘smoke free’.
The threat was on full display in British American’s latest trading statement today (2 June). And it sent the Footsie firm’s share price scuttling lower.
What’s happened?
Cigarette sales are cooling globally as health concerns over smoking accelerate. The problem for tobacco companies is made all the worse by lawmakers clamping down on the sale, marketing and usage of combustibles.
Such restrictions were piloted in developed markets, and now they’re spreading rapidly in critical emerging regions such as Asia. The result? This is causing the industry to contract more sharply than had been feared, as today’s news shows.
The FTSE 100 company now expects sector-wide cigarette volumes to drop 2.5% in 2026. That’s worse than the 2% decline it had previously expected.
As a result, British American reckons its own full-year results will be “[at the] lower end of our medium-term guidance ranges” of:
- 3%-5% revenue growth.
- 4%-6% adjusted profit from operations growth.
In better news…
Unsurprisingly, cigarette firms are turning towards non-combustibles to drive revenues And for British American Tobacco, it’s paying off — the firm is now a market leader with products such as its Vuse vapes and Velo gum.
The good news? Sales of these products actually exceeded expectations in H1. According to the company, “revenue growth is accelerating and we now expect to deliver mid-teens for 2026“. Low double-digit growth had previously been tipped.
But does this offset problems elsewhere in the business? The market reaction to today’s results suggests not, and I agree. New categories account for just 18% of group revenues. And British American’s plans to hike this to 50% may come to nothing as regulators increasingly clamp down on activities like vaping.
Concerns over the profitability aren’t going to go away any time soon either. Margins are far weaker than those of the firm’s traditional products, reflecting their higher R&D and marketing costs.
A FTSE 100 dip buy?
British American Tobacco’s share price may have dropped today but the tobacco titan’s still pretty expensive in my view, its price-to-earnings (P/E) ratio sitting at a FTSE 100-topping 13.6 times. I don’t think this can be justified given the enormous risks the company faces so don’t see it as one to consider.
Should you invest £5,000 in British American Tobacco P.l.c. right now?
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Royston Wild does not hold any positions in the companies mentioned.
