BAT warns of Covid-19 sales hit but commits to dividend payout

British American Tobacco lowered full year guidance as coronavirus travel bans and lockdowns in South Africa, Mexico and Argentina hammered sales.

The maker of Pall Mall and Rothmans on Tuesday said it expected constant currency adjusted revenue growth of 1% - 3% from previous guidance of around the lower end of 3% - 5%. It also forecast mid-single figure adjusted diluted earnings per share growth, compared with high single figure previously as sales in emerging markets were hit.

BAT added that it would maintain dividends, paying out at a ratio of 65% of adjusted diluted EPS and growth in sterling terms, “supported by a strong liquidity position”.

It said revenue had been especially hard hit in South Africa where sales of tobacco were stopped completely in March as part of measures to combat the virus. US sales were proving more resilient than expected across the industry, with volumes falling around 4% this year.

Debt reduction would continue, but at a slower rate, BAT added.

Richard Hunter, head of markets at interactive investor said the "bull case" on BAT shares remained clear.

"BAT continues to generate cash on a prodigious basis given the underlying inelastic demand of its products, while also reaping the reward of high margins following a major cut to production costs after moving its manufacturing facilities some years ago to more cost-efficient geographies," he said.

Hunter said the stock had outperformed the FTSE 100, rising nearly 4%, as compared to a 12% decline for the wider index over the last year, displaying some of its defensive qualities.

"At the same time, appetite for the shares is undiminished, with the market consensus remaining firmly in place as a strong buy.”

AJ Bell investment director Russ Mould said analysts had been looking for a 4% increase in EPS to 335.4p a share, which underpinned estimates of an identical increase in the full-year dividend – paid in quarterly instalments – "to just shy of 219p a share".

"If that sum is indeed paid, it would add to BAT’s streak of increased annual dividend payments which dates back to 1998, according to Refinitiv data," Mould said.

“Those forecasts will not be going up after today and they may even come down very slightly, but a dividend of just under 219p a share still equates to a dividend yield of 7.3%, more than enough to catch the eye of income-starved investors who have seen 46 FTSE 100 firms cut, defer, suspend or cancel a dividend payment already in 2020."

“The question that analysts need to ask themselves about BAT – and indeed the other big payers in the FTSE 100 – is whether the pay-out ratios are defensible over the short-term, owing to any hit to business from COVID-19, and then the long-term, which issues such as competitive position, regulatory threat, management acumen and financial strength will all remain key considerations.".

Mould also cautioned that the tobacco industry was no longer guaranteed to be immune from volatility, with falling global volumes and regulatory pressure on branding and advertising and now Next Generation Products which could mean "some investors are less convinced of the long-term cash-generative capabilities of tobacco".