British American Tobacco PLC (LSE:BATS) has been downgraded by RBC Capital Markets as the shares are no longer viewed as cheap in light of ESG constraints on institutional investors.
This is despite the cigarette and vape manufacturer and rival Imperial Brands PLC (LSE:IMB) being able to buy back their entire market capitalisations this decade, the broker said, even with the £2bn share buyback unveiled last week.
BAT’s next generation products (NGPs) also continue to make progress and should help the company achieve its target for profitability for 2025, the broker said.
However, environmental, social and governance (ESG) constraints have been holding back investors, and as a result, the broker no longer sees “any material positive catalysts for BAT’s share price.”
ESG constraints make it "increasingly difficult for investors to justify an investment in the stocks”, RBC said, though it acknowledged that this “hasn't been a significant drag on the shares' performance in recent weeks”.
RBC also questioned the sustainability of its current derived cash-flow, citing declining volumes and the effects on the overall sales mix as lower-margin NGPs increase.