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BAT lifts dividend after 20% increase in profit

The global tobacco sector further enhanced its reputation as a safe haven for investors on Thursday after British American Tobacco, the world’s second-largest publicly listed cigarette company, delivered a 20 per cent jump in annual pre-tax profits and raised its dividend payment by more than a quarter.

For the year to December 31, sales volume rose a modest 1 per cent on an organic basis. But revenue grew by more than a fifth to £12.1bn ($17.3bn) thanks to price increases and currency gains from the weak pound.

Pre-tax profit rose from £3.1bn to £3.7bn, while the full-year dividend increased from 66.2p to 83.7p via a 61.6p final payout.

The figures, which even the most ardent non-smoker will find tough to ignore, suggest that despite the spate of bad news in recent weeks from the likes of Unilever and Kraft, food companies that are normally seen as ultra-safe, not all defensive stocks have run out of steam.

EDITOR’S CHOICE BAT results beat forecasts - Oct-31 Thrift threat to premium cigarettes market - Oct-26 Resilient BAT raises dividend - Aug-01 Battleground for smokers lies in new markets - Jun-06 BAT stake spin-off strategy takes shape - May-23 Focus on emerging markets sustains BAT - May-07

Jonathan Jackson, head of equities at Killik & Co, said the global top four – Philip Morris International, BAT, Japan Tobacco and Imperial Tobacco – which control about 69 per cent of world cigarette sales excluding China, are more resilient to the downturn than food and staple goods retailers. “They have more pricing power, wide geographical spread and brands across all price ranges, giving them more protection against down-trading.”

This view was echoed by Adam Spielman, tobacco analyst at Citigroup. He argued in a note this month that Imperial is “arguably, the most defensive of all European large-cap consumer names”.

But Mark Costar, a fund manager at JO Hambro Capital Management, said that, while tobacco was less vulnerable to a downturn in spending, he feels the sector’s shares are now fully priced. “There are long-term structural issues within the industry and these are not being discounted in current share prices,” he said.

Although tobacco consumption is declining worldwide, tobacco companies have continued to grow profits during the past decade. In the US and Europe, where public health programmes and high taxes have reduced smoking rates, the fall in volume has been offset by price increases.

Emerging markets, where tobacco use is still growing, has also helped make up for the decline in developed countries.

The World Health Organisation estimates that the number of smokers will grow from 1.3bn in 2006 to 1.7bn by 2025, with the bulk of new smokers coming from Asia and eastern Europe.