Shares in British American Tobacco (BATS) wafted 3.4% lower to £30.15 on Tuesday after the global cigarettes titan was hit by coronavirus lockdowns in emerging markets.
The firm cut annual adjusted profit and revenue forecasts, blaming the impact of prolonged lockdowns in South Africa and Mexico, as well as weaker sales in countries including Bangladesh and Vietnam.
Cushioning the blow for income investors was an assurance from the cigarettes giant that it would stick with its 65% dividend payout target for the year thanks to a ‘strong liquidity position’.
DOWNGRADING GUIDANCE
In today’s trading update, the world’s second largest tobacco group warned it now expects constant currency adjusted revenue growth in the 1%-to-3% range for 2020.
That is a downgrade from the company’s prior expectation of revenue growth ‘around the lower end’ of the 3%-to-5% range.
The behemoth behind brands including Dunhill, Pall Mall, Kent, Newport and Lucky Strike also trimmed its annual profit forecast.
Investors can now expect adjusted earnings per share to grow in the mid-single digit percentage range, so a slowdown from British American Tobacco’s earlier forecast of a high-single digit increase.
EMERGING MARKETS PAIN
Results in developed markets, which speak for 75% of group sales, are ‘strong, with continued good pricing, little evidence of accelerated downtrading to date and a particularly strong performance from our business in the US, which has been highly resilient throughout the COVID-19 crisis’, said British American Tobacco.
Unfortunately, COVID-19’s impact in emerging markets has been ‘more pronounced, including in Bangladesh, Vietnam and Malaysia’.
Closures and other lockdown measures in certain countries, notably South Africa, where British American Tobacco bemoaned the ongoing COVID-19-related tobacco sales ban, as well as Mexico and Argentina, have ‘persisted longer than anticipated’.
In a further disappointment, British American Tobacco also pushed its target for generating £5bn in sales from its new categories - e-cigarettes, tobacco heating products and oral products - out from 2023-24 to 2025.
DEPENDABLE DIVIDENDS
However unlike smaller rival Imperial Brands (IMB), which cut its annual dividend by a third last month in a bid to conserve cash during the pandemic, British American Tobacco maintained its 65% dividend payout target for the year.
The consumer goods giant is drawing confidence from a robust operational performance, delivered in the face of ‘a very challenging and volatile trading environment’, as well as ‘a strong liquidity position’, with reliable cash flow supported by recent bond issuances and an undrawn £6bn revolving credit facility.
Chief executive Jack Bowles commented: ‘We have made a good start to the year, with strong volume and value share growth in combustibles underpinning the sustainability of the business.’
He added: ‘Our purpose is clear, we are committed to Building a Better Tomorrow. This includes our potential vaccine for COVID-19, under development at our US bio-tech subsidiary, Kentucky BioProcessing (KBP), which has demonstrated its ability to generate an immune response in pre-clinical testing and is poised to move to clinical trials.’
