British American Tobacco PLC (LSE:BATS) has nudged up its guidance for the year ahead.
It’s a modest tweak, but it comes with a stronger signal that one of the market’s most traditional defensives still has life left in it, even as the world changes around it.
The company now expects revenue to grow by 1% to 2% in 2025, with adjusted operating profit growth of up to 2.5%.
These are not figures to set pulses racing, but the update carried more weight in what it implied than in what it said outright. Growth is back in the United States, and new category products, the heated, vaped and pouched future of nicotine, are picking up pace.
A business in reset mode
BAT has had to reset. Regulatory pressure, especially in the US, has forced a rethink of its growth plans. The historic impairments it has taken reflect that. But that reset may now be doing what it was meant to do, giving the business a more grounded base for its next phase.
This year is a "deployment year" for BAT. That means rolling out new products and trying to gain market share in new formats. Velo pouches are already performing strongly.
Glo, the heat-not-burn product, has slipped in some markets but may recover with the launch of the new Hilo range. Vuse, the company's flagship vape, continues to feel the pressure from illicit products in North America.
US comeback matters
The big shift in the latest update is the return to revenue and profit growth in the US. This is crucial. Around 45% of BAT’s revenue comes from the US, so a turnaround there has real weight.
Cigarettes, especially brands like Natural American Spirit and Lucky Strike, are helping. So is the performance of Velo.
This is also what supports the investment case laid out by analysts. They argue that tobacco is one of the strongest stories in the UK market right now. The sector offers yield, value and reliability at a time when those things are in short supply.
Cash and discipline
BAT is converting more than 90% of its earnings into cash. It has increased its buyback to £1.1 billion and has a clear plan to reduce its debt over the next two years. The yield, now over 10%, speaks for itself.
The shares trade at around six times forward earnings. That reflects the caution investors still have toward the sector. But if the impairments and regulatory hits are largely behind it, BAT starts to look like a different prospect. Not a growth stock, but not a value trap either.
Why this isn’t 2008
World trade fears, stoked by the Trump administration, have stalked global markets and there is a fear that the global economy may be headed down the pan, or towards recession at least.
Gold is a great proxy for fear in the global market: a haven in times of global turmoil. That its price is at record levels says all you need to know about the fragility of confidence at the moment.
Usually, tobacco stocks are among those prized for their robustness in troubled times; though the thesis failed on one notable occasion: the banking crisis, where all rational investment analysis went out the window.
At times, with the quixotic US tariff policy, it has felt like the world has been staring into the abyss of something similar to the Lehman collapse.
However, Panmure Liberum, in a recent note, made a helpful comparison. This is not a replay of 2008, when fear gripped the market and even defensive sectors took a hit.
Today looks more like the early 2000s, when investors pulled away from overvalued growth stocks and looked for businesses with earnings, cash and pricing power.
Back then, tobacco stocks led the way. Panmure said it saw something similar starting to happen now. The argument is that much of the bad news has been priced in already. Regulations, taxes and lawsuits are now part of the wallpaper rather than market shocks.
Where the risks still sit
The risks haven’t gone away. BAT still relies on cigarettes for the majority of its revenue.
The regulatory landscape remains unpredictable, particularly in key markets like the US and Australia. The rise of illicit vape products is a real threat and undermines pricing discipline in legal markets.
There’s also the challenge of execution. BAT wants half its revenue to come from new category products. That is not going to happen overnight. It depends on consumers switching in large numbers and staying there. That takes time and trust, and not all products will succeed.
Still defensive, but not untouchable
BAT still fits the profile of a defensive stock. It delivers income, generates cash and has pricing power. It is also more stable than it has been in some time, particularly if US growth continues.
But this is not a company on autopilot. It is rebuilding its narrative and relying on a transition that still has a long way to run.
For investors looking to rebalance away from risk-heavy sectors, BAT remains a candidate. But like any business in flux, it carries a few scars that are worth keeping in sight.