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British American Tobacco said on Thursday that it was working on divesting some of its nearly 30 per cent stake in India’s largest tobacco company ITC, potentially paving the way for it to resume share buybacks to reward investors.
Tadeu Marroco, BAT’s chief executive, said: “We continue to pursue all opportunities to enhance balance sheet flexibility and, as part of this, we regularly review our stake in ITC”, which is valued at an estimated £15bn, according to Barclays.
Marroco added that the 29.2 per cent stake in the Indian conglomerate, which sells everything from technology solutions to hotel rooms, “offers us the opportunity to release and reallocate some capital”. Shares in London-listed BAT rose by over 7 per cent to £24.90 in early morning trading.
Shortly after Marroco was appointed to the top job in May last year, Rajiv Jain, founder of GQG Partners, a top-five BAT shareholder, told the Financial Times that he wanted the newly-installed chief executive to buy back shares in an “aggressive manner”. His calls were echoed by other major shareholders. BAT launched a £2bn share repurchase programme in February 2022 but opted not to renew it last year.
Marroco said that BAT had been “actively working for some time on completing the regulatory process required to give us the flexibility to monetise some of our shareholding” in ITC. BAT has held an interest in ITC since the early 1900s.
In a nod to the possible resumption of the share buyback programme, Marroco said on Thursday that once BAT reduced its leverage to about 2.5 times earnings “we will evaluate all opportunities to return excess cash to our shareholders”.
Dividends and share buybacks are a key lure for investors taking contrarian bets on tobacco stocks, which have been shunned by many large fund managers because of ESG mandates. Altria, which owns the rights to manufacture Marlboro cigarettes in the US, announced a $1bn share buyback last week and London-listed Imperial Brands has an ongoing £1.1bn share buyback scheme.
Rae Maile, an analyst at Panmure Gordon, said “freeing capital [from the ITC stake sale] would be useful while the company continues to prioritise debt reduction over buying in cheap shares” but he cautioned that with a possible payout due for ongoing litigation in Canada “then it may be a touch too early to get excited about buybacks returning”.
Analysts at Barclays said reducing leverage closer to two times was important for BAT as it sought to regain competitiveness against Philip Morris International, Altria and Imperial.
The announcement of plans to offload some of its stake in ITC came as BAT said it was facing an even bigger writedown in the value of some of its US cigarette brands than anticipated. The company said on Thursday that the impairment charge would come to £27.3bn, instead of £25bn as previously flagged.
Marroco said that the charge would be 9 per cent higher than originally expected following a “detailed, thorough review” conducted ahead of its full-year results and taking into account foreign exchange fluctuations.
Marroco said in a separate statement that the size of the writedown took into account “the current macroeconomic pressures impacting the US combustibles industry, the growth of illicit single-use vapour products and uncertainty around a potential menthol ban in the US”.
Announcing preliminary results on Thursday BAT said it projected “low-single figure” organic revenue and profit growth in 2024 because of an “expected slow recovery” in the US economy. BAT generated £27.3bn in revenues in 2023.
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