Where will British American Tobacco stocks be in five years?

British American Tobacco (BTI 0.13%) We achieved our key targets in 2023, two years ahead of schedule. This is a good result for a company facing an existential crisis. As we watch this global cigarette manufacturer, we must keep in mind both the progress it is making in other areas of the company and the goals it has set for itself.

The biggest problem with British American Tobacco

There is no doubt that British American Tobacco is going through difficult times. Cigarette sales, the consumer staples maker’s core business, are declining. In 2018, approximately 700 billion cigarettes were produced. However, over the next five years or so, its size declined significantly by 21% to $555 billion. If that had happened to any other consumer staple, the company’s investors would have run for the hills.

To be fair, British American Tobacco’s stock price is down more than 50% since its 2017 peak. So Wall Street is clearly avoiding the stock. However, the stock has a hefty dividend yield of 9.5%, so there are probably plenty of dividend investors researching the company to find their diamonds. What’s interesting is that despite the decline in production, British American Tobacco was able to maintain its hefty dividend payments by raising prices to offset the damage.

BTI data from YCharts.

It looks like the company can maintain the low volume/high price trend for a bit longer. So the dividend probably isn’t at risk in the near term. But at some point, price increases are likely to further deepen the downturn in the tobacco business. Reaching that tipping point would be very damaging to British American Tobacco. Executives have acknowledged that results will be available in 2023 as they change the way they describe the American brand, which will effectively become worthless in 30 years (previously, the brand was expected to continue to exist in perpetuity).

Here’s what British American Tobacco is doing about it.

Considering the 2023 accounting changes, it’s clear that British American Tobacco (BAT) isn’t trying to pretend that the problems it faces aren’t real. In fact, we have been working to build a ‘new category’ division that handles non-combustible products such as vapes, pouches, and heated tobacco. The business is not yet large, but it is growing. In 2023, new category businesses accounted for nearly 17% of sales.

The company’s goal is to reach that number at 50% by 2035, a little more than a decade from now. Progress toward that goal will probably be somewhat uncertain and will depend at least in part on how well the tobacco sector does, but investors watching British American Tobacco will see clear progress toward that goal over the next five years. you will want to Considering that the figure is currently at 17%, it is not far-fetched to expect it to reach 25% within five years.

That said, there was some noteworthy good news in 2023 that was incredibly important in new categories. According to the company’s annual earnings release, “The new category achieved profitability (at the category contribution level) in 2023, two years ahead of our original target.” This is important because it means that the division will not have a significant impact on the company’s overall results going forward. This is a great sign that British American Tobacco is succeeding in its efforts to take its business in a new direction.

Fewer cigarettes, more new categories

So investors watching British American Tobacco over the next five years will want to see two things. First, continued growth in new categories. Second, slow the decline of the tobacco business as much as possible. Ultimately, the big picture is that the company needs to change, it has set goals for that change, and Wall Street needs to track the progress of that change. If British American Tobacco can consistently achieve its internal goals, it may actually be able to survive the decline of the tobacco industry and continue to pay attractive dividends to investors.