UK shares drifted in early trade as any recent year-end ebullience has evaporated, at least for the moment. The risk-off approach that has permeated investor sentiment has been driven by any number of factors, and the pressure has overspilled to a retailing sector which has increasingly borne the brunt of the potentially damaging measures previously announced in the Budget. Both JD Sports (LON:JD) and Primark owner Associated British Foods (LON:ABF) dipped in opening exchanges, with the mining stocks falling again in a sign of investor uncertainty.
The initial decline reduces the performance of the FTSE 100 in the year to date to an increase of 6.7%, with the FTSE 250 having added 6.2% in the same period. While both markets are increasingly accepted to be on extremely cheap valuations compared to global peers let alone historically, investors have continued to seek strong growth returns elsewhere, especially in the US where markets continue to test record highs.”
British American Tobacco Trading Statement
British American Tobacco (LON:BATS) is positioning itself for the future, and the latest update has shown a stronger second half of the year which keeps the group’s full-year guidance in line.
The pressure on traditional tobacco products has been in evidence for some considerable time, driven both by changing lifestyle habits as well as increasing regulation. A more recent volley came from the UK Prime Minister with plans to incrementally ban tobacco sales, especially to youngsters, resulting in share price declines across the sector when it was announced. This adds to the burden of regulatory censure which has plagued the sector over recent years, a general decline in traditional tobacco products sales as health issues come to the fore and a reluctance among some investors to invest in tobacco companies at all on ethical grounds.
At the same time, the need for a long-term replacement for traditional combustible products left the tobacco majors needing to move from a standing start, and even after some years of development the New Categories unit has yet to make a meaningful contribution to profits. Even so, BATS has an ambitious target of becoming a predominantly “smokeless” business by 2035, which it defines as having 50% of group revenues emanating from smokeless non-combustibles such as vapes and heated products. It remains to be seen whether the growth can be continued at a pace which can even begin to offset the decline in combustibles remains a core question overhanging the sector, let alone whether the current levels of margin and profitably can be replaced.
In the meantime, however, there are some promising signs with some robust pricing and attention being given to the group’s large US combustible exposure. This is in response to trading pressure Stateside, where the group estimates that industry volumes have fallen by 9% so far this year. In addition, BATS estimates that capital expenditure this year will land at £600 million, with the implementation and benefit beginning to wash through next year, especially in the US.
Investors have recently been handsomely rewarded for their patience among a tide of turbulence. The shares have risen by 28% over the last year, as compared to a gain of 10% for the wider FTSE 100, in addition to which a dividend yield of 7.9% is punchy by any standards. The group remains committed to a higher level of shareholder returns including further buyback programmes, despite the investment needed in transitioning the company. In the nearer term, however, the market consensus is that Imperial Brands (LON:IMB) remains the favoured play in the sector, with BATS coming in at a hold, albeit a strong one.