British American Tobacco: From Cigarettes to Nicotine Portfolios

British American Tobacco is one of the world’s largest nicotine companies, with a global footprint spanning over 180 markets and a portfolio that includes both traditional cigarettes and newer, reduced-risk products. From well-established brands like Dunhill and Lucky Strike to fast-growing offerings such as Vuse, Glo, and Velo, the company blends cash-generating stability with a push toward long-term transformation. With strong pricing power, high free cash flow, and a strategic focus on innovation, British American Tobacco is navigating a complex landscape of regulatory pressure and shifting consumer habits. The question is: Does this tobacco giant still belong in a long-term investor’s portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in British American Tobacco at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of British American Tobacco, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

British American Tobacco is one of the world’s largest tobacco companies, operating in over 180 markets and reaching around 150 million consumers through more than 11 million retail outlets. It holds the position as the second-largest tobacco group globally by market share and manages a portfolio of over 300 brands, including well-known names such as Dunhill, Kent, Lucky Strike, and Pall Mall. The company’s operations span traditional combustible tobacco products as well as a growing segment of reduced-risk alternatives. These New Category products include vapor (Vuse e-cigarettes), heated tobacco (glo devices), and modern oral nicotine pouches (Velo). In 2024, these New Categories accounted for around 17,5 percent of group revenue. BAT aims to become a predominantly smoke-free business by 2035, guided by its vision to build a smokeless world. BAT’s business model is structured across three complementary regions, balancing exposure to high-growth emerging markets with profitability from developed markets. It emphasizes consumer insights, data analytics, and responsible innovation to stay aligned with evolving preferences. The company’s global scale enables cost efficiencies and widespread distribution, while its local market expertise ensures relevance in diverse environments. BAT is also investing in digital hubs, innovation centres, and partnerships to drive growth in new products, supported by its corporate venturing arm, Btomorrow Ventures. The company enjoys several competitive moats, including global scale, strong brand equity, regulatory expertise, scientific credibility, and early leadership in reduced-risk products. Its global presence allows it to benefit from cost synergies and supply chain strength. Its brand portfolio holds leadership positions in more than 50 markets and spans premium to value price points, providing pricing power and consumer stickiness. BAT has deep experience navigating complex regulatory landscapes, which is especially important as reduced-risk products face increasing scrutiny. Its scientific capabilities, including robust clinical studies and product validation, help it build trust with regulators and consumers. Vuse leads the U.S. vaping market with approximately 50 percent share in tracked channels, while Velo gives the company a head start in the nicotine pouch segment. BAT generates strong, recurring cash flow from its legacy tobacco business, which funds investment in innovation and supports generous shareholder returns. Its vertically integrated sourcing, including direct contracts with nearly 91,000 farmers, ensures supply chain control and sustainability.

Management

Tadeu Marroco serves as the CEO of British American Tobacco, a role he assumed in May 2023 after more than three decades with the company. He joined BAT in 1992 and has since held a variety of leadership roles across finance, strategy, and regional operations. His educational background includes a degree in electrical engineering from the Universidade Federal do Rio de Janeiro and an MBA from both the COPPEAD Graduate School of Business in Brazil and ESSEC Business School in France. Prior to becoming CEO, Tadeu Marroco played a central role in shaping and executing BAT’s “A Better Tomorrow” strategy, which focuses on accelerating the company’s transformation into a multi-category, non-combustible business. He earned recognition for building high-performing teams and for delivering strong financial results, consistently balancing growth with operational efficiency. His leadership has been marked by a data-driven approach, a deep understanding of the regulatory landscape, and a long-term vision for sustainable value creation. As CEO, Tadeu Marroco has committed to continuing the transformation of BAT’s portfolio while reinforcing a culture of agility, inclusivity, and collaboration. He has emphasized the need to modernize the organization to better respond to consumer trends and regulatory change, aiming to build a more progressive and responsive company. While still early in his tenure, Tadeu Marroco’s decades of experience within BAT and the broader industry give him a firm grasp of the challenges and opportunities ahead. Given his leadership during key phases of the company’s strategic evolution and his stated commitment to innovation and responsibility, I feel confident in his ability to steer British American Tobacco through its next chapter.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. British American Tobacco’s ROIC has stayed low since 2017, largely because of the expensive acquisition of Reynolds American. That deal added a lot of debt and goodwill to the balance sheet, which increased the amount of capital the company had tied up. In the years after the deal, some of the U.S. cigarette brands BAT acquired lost value, and in 2023 the company had to write down their worth by £25 billion. This major accounting loss hurt profits and pushed ROIC even lower. At the same time, the company has faced challenges in its core cigarette business, especially in the U.S., where consumers are trading down to cheaper brands or shifting to illicit alternatives like unregulated vaping products. These trends have weighed on pricing power and margins. On top of that, BAT has been investing heavily in its New Categories segment - including vaping, heated tobacco, and nicotine pouches - which require significant upfront costs in R&D, marketing, and infrastructure. While these investments are crucial for long-term growth, they take time to generate meaningful returns. Lastly, the high debt levels resulting from past acquisitions have also contributed to a lower ROIC. The combination of reduced earnings and a larger capital base has made it difficult for ROIC to rise above the company’s cost of capital in recent years. However, if BAT can continue growing its New Categories profitably and reduce its debt burden over time, ROIC should gradually improve.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. The sharp increase in British American Tobacco’s equity in 2017 was primarily due to the acquisition of Reynolds American, which significantly expanded the company’s asset base and added a large amount of goodwill. This boosted the accounting value of shareholders’ equity. However, over the past two years, equity has declined noticeably. The main reason is a series of large impairment charges, particularly related to the U.S. cigarette brands acquired through Reynolds. These write-downs reduce the value of assets on the balance sheet and lower retained earnings, which directly reduces total equity. So while the company’s equity rose sharply in 2017 due to the acquisition, it has since fallen as those assets have been revalued downward to reflect weaker long-term expectations. This decline in equity isn’t necessarily a sign of financial distress, but it does reflect the reality that some past investments, especially in U.S. cigarettes, have not lived up to earlier expectations. As long as the company continues to generate strong cash flow and manage its debt, the reduction in equity is more of an accounting adjustment than a cause for concern.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that British American has managed to achieve positive free cash flow every year, and while it decreased slightly in 2024, it remains at the upper end. The company has historically maintained a high free cash flow margin, thanks to a combination of factors. Its core tobacco business is highly profitable, with strong pricing power and efficient operations that allow a large portion of revenue to turn into operating profit. In addition, BAT runs a capital-light model. It does not need to spend heavily on new factories or equipment to maintain or grow the business. Cigarette manufacturing is a mature and stable process, supported by a global network of well-established production facilities that require relatively little ongoing investment. Even in newer categories like vaping and oral nicotine, much of the investment is directed toward R&D, marketing, and regulatory compliance rather than physical infrastructure. As a result, the company consistently converts a high share of its operating cash flow into free cash flow. BAT expects to remain a highly cash-generative company and is forecasting over 60 billion dollars in free cash flow between 2024 and 2030. This cash will be used to reduce debt, pay dividends, and repurchase shares. As a result, shareholders should expect higher dividends and fewer shares outstanding as BAT grows its free cash flow. While the free cash flow yield is not as high as it was in the past, it remains elevated and suggests that the shares are trading at a very attractive valuation. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to investigate is a company’s debt. We need to determine whether the business carries a manageable level of debt - ideally one that could be repaid within three years using current earnings. This can be assessed by calculating the ratio of long-term debt to earnings. In the case of British American Tobacco, the debt-to-earnings ratio stands at approximately 10,8 years, which is significantly higher than my preferred threshold. Based on current earnings, BAT would need over ten years to repay its long-term debt, which raises concerns about financials. However, management is taking steps to reduce leverage. Most of its debt is fixed at low rates, with long maturities and limited currency risk. Leverage has come down to 2,4 times EBITDA, and the company expects to return to its target range of 2,0 to 2,5 times by 2026. BAT also plans to sell its stake in the Indian hotel chain ITC to help reduce debt further. Although the current debt level is higher than I prefer, the company’s clear plan and strong debt structure provide some reassurance. It will be important to track their progress over the next couple of years.

Exclusive Discounts on Seeking Alpha – Elevate Your Investing Today!

For those serious about investing, here's your chance to upgrade your strategy with exclusive offers you won't find anywhere else. These special discounts are available only through the links below—don’t miss out!

1. Seeking Alpha Premium: Access comprehensive financial data, earnings transcripts, in-depth analysis, market news, and more. Perfect for investors who want an edge in making informed decisions.

   Special Price: $269/year (originally $299) + 7-day free trial.

   Sign up for Premium here.

   
   

2. Alpha Picks: Get stock recommendations from a portfolio that gained +177% compared to the S&P 500's +56% from July 2022 through the end of 2024.

   Special Price: $449/year (originally $499).

   Sign up for Alpha Picks here.

   
   

3. Alpha Picks + Premium Bundle: The ultimate investment package with a $159 discount!

   Special Price: $639/year (originally $798).

   Get the Bundle here.

   
   

I use Seeking Alpha daily for its reliable insights and actionable strategies. These deals are available exclusively through my links, so take advantage of them now to level up your investment journey!

Act quickly - these prices won't last forever!

Risks

Regulation is a risk for British American Tobacco. The company operates in a highly regulated industry where governments around the world impose strict rules on the sale, marketing, packaging, and taxation of tobacco and nicotine products. These regulations vary by country, can change quickly, and are often becoming more restrictive as public health policies evolve. Because BAT sells its products in over 180 markets, it must navigate a complex and constantly shifting regulatory landscape. In traditional tobacco, regulation includes high taxes, plain packaging laws, graphic health warnings, restrictions on advertising and sponsorships, bans on retail displays, and smoking bans in public areas. These measures are designed to reduce smoking rates but also limit BAT’s ability to grow volumes or maintain brand loyalty and pricing power. For example, plain packaging laws in countries like Australia and the United Kingdom have made it harder for consumers to distinguish between brands. In newer product categories such as vaping, heated tobacco, and nicotine pouches, the regulatory environment is still developing and often unpredictable. Some countries support these products as tools for harm reduction, while others ban them entirely or restrict them heavily. The United States Food and Drug Administration requires pre-market approval for all vape products and has rejected many applications, which poses a risk to BAT’s presence in the important US market. Legal and litigation risks also fall under the regulatory umbrella. BAT continues to face lawsuits and legal claims related to health impacts, marketing practices, and product safety. These can result in major legal costs or settlements, as seen in 2024 with the large provision tied to a Canadian class action case.

Changing consumer preferences is a risk for British American Tobacco because its entire business model depends on the continued use of nicotine products. While the company has long managed a gradual decline in cigarette volumes, the more significant challenge today is the broader shift in public attitudes toward nicotine itself—especially among younger generations. In the past, the decline in smoking was largely driven by existing smokers trying to quit. Now, the bigger trend is that many young adults are simply choosing not to start using nicotine at all. This change affects not just cigarettes, but also the newer, smoke-free products that BAT is investing in, such as vaping devices and nicotine pouches. Gen Z and younger millennials tend to be more health-conscious, more informed about the risks of nicotine, and less socially accepting of its use in any form. Unlike in previous decades, nicotine no longer carries the same cultural relevance or appeal, even in supposedly reduced-risk formats. This shift in mindset is reinforced by strong public health messaging, school-based education, and social media campaigns that actively discourage nicotine use. As a result, even if BAT successfully transitions its portfolio away from cigarettes, it may still face a shrinking addressable market simply because fewer adults are interested in using nicotine in any form. There are also implications for pricing power and brand strength. If nicotine products become less relevant to younger consumers, brand loyalty may weaken, and BAT could lose the ability to charge premium prices for both traditional and newer products. This would put pressure on margins and reduce the company’s ability to offset volume declines through pricing.

Illicit products are a major and growing risk for British American Tobacco. The company operates in highly regulated markets where legal products must meet strict requirements on ingredients, packaging, flavors, taxation, and health warnings. In contrast, illegal products, particularly in the vapor category, often bypass these rules entirely. This creates an uneven playing field and undermines the effectiveness of BAT’s regulated, reduced-risk offerings. In key markets like the United States and Canada, enforcement against illicit vapor products remains weak. Unauthorized, flavored disposable vapes have flooded the market, often sold at lower prices and offering features that appeal to consumers, especially younger adults. These products are not approved by regulators like the FDA, but they now make up a significant portion of the total vapor market. In the U.S. alone, illicit vapor products are estimated to account for over 60 percent of the category, severely distorting competition. BAT, by contrast, can only sell products that meet regulatory approval, often at higher cost and with fewer flavor options, making it harder to compete. This issue affects not just vapor products, but also has knock-on effects on the legal combustible market. As consumers turn to cheaper, illegal options, legal industry volumes have declined. BAT reported that the illicit trade contributed to a roughly 9 percent decline in the U.S. legal combustibles market. In countries like Australia, the problem is even more severe, with an estimated 65 percent of total nicotine consumption coming from illicit sources due to a mix of restrictive policies and poor enforcement. Furthermore, as governments introduce new taxes, advertising restrictions, or flavor bans without corresponding enforcement, illicit trade is likely to accelerate. This is already happening in markets such as Malaysia and Bangladesh, where new taxes and restrictions are fueling a rise in illegal sales.

Reasons to invest

British American Tobacco’s combustible tobacco portfolio remains a key reason to invest in the company, even as it shifts focus toward reduced-risk products. Despite a long-term decline in global smoking rates, BAT continues to generate strong cash flow from cigarettes, which still account for the vast majority of its revenue. This cash is critical as it funds dividends, debt reduction, and the company’s transformation into a more diversified nicotine business. One of the main reasons combustibles remain so valuable is pricing power. Cigarettes are highly profitable products with relatively inelastic demand, meaning BAT can regularly raise prices to offset falling volumes. In 2024, for instance, global volumes declined about 5 percent, but price and mix improvements of over 5 percent helped keep revenue flat. The company is also seeing share gains in key segments. Lucky Strike, for example, remains the fastest-growing cigarette brand in the branded value segment. In the U.S., it has taken steps to strengthen distribution and invest in portfolio upgrades, including a new soft pack format for Newport, one of its leading brands. These efforts are helping BAT defend and grow market share even in tough environments. Another overlooked advantage is the regulatory environment. Stringent restrictions on tobacco advertising and new product launches have made it very difficult for new competitors to enter the cigarette market or build brand recognition. This protects established players like BAT and reinforces the value of its longstanding global brands. In effect, the regulations that limit competition also help defend BAT’s market position.

The New Categories segment is a compelling reason to invest in British American Tobacco because it represents the company's clearest path to long-term, sustainable growth in a world where cigarette consumption is declining. These products - vapor, heated tobacco, and modern oral nicotine - now account for 17,5 percent of group revenue and continue to grow in both sales and profitability. In 2024 alone, BAT added 3,6 million new consumers in these categories, reaching a total of 29,1 million users. Modern Oral, in particular, stands out as the fastest-growing segment. BAT’s Velo brand has gained strong traction globally. The company now leads the modern oral category in several regions, with significant share in AME, where Velo captured 70 percent of the category's revenue growth. Usage is rising in both established and emerging markets, and non-traditional regions now account for 20 percent of industry volume, showing that demand is not limited to the Nordic countries where the category originally took off. In vapor, BAT is benefiting from the global expansion of the category and has seen accelerated consumer growth. Although heated tobacco is growing at a slower pace due to poly usage (consumers using multiple nicotine formats), BAT has still managed to improve profitability through premium positioning and better consumables under the glo brand. Crucially, BAT is not chasing growth at any cost. It is focused on "quality growth," meaning it invests in New Categories with a disciplined approach - targeting high-value markets and ensuring return on investment. This strategy is already paying off: the category contribution margin rose by seven percentage points in 2024.

Innovation is a strong reason to invest in British American Tobacco.  In recent years, BAT has completely overhauled its innovation ecosystem, shifting from a fragmented approach to a focused, consumer-led pipeline designed to improve both product appeal and profitability across its New Categories. The company is now launching products that are more competitive, more differentiated, and better aligned with consumer preferences, especially in the high-growth areas of vapor, heated tobacco, and modern oral nicotine. This innovation push is already delivering results. In 2024, BAT’s new product launches helped accelerate New Category growth in the second half of the year. Notably, products like Glo Hyper Pro and a refreshed Velo mix in the U.S. helped improve performance across multiple markets, and Glo revenue rose by nearly 6 percent. BAT has also made strategic moves into premium segments that remain underdeveloped. For instance, the introduction of Vuse Ultra in vapor and Glo Hilo in heated tobacco aims to capture value in premium categories that currently make up a large share of industry profit pools. In modern oral, the launch of Velo Plus - with higher moisture content and broader flavor options - is showing strong early results, expanding BAT’s share in the fastest-growing nicotine category globally. These products are designed not only to drive consumer trial but also to boost retention, daily usage, and brand equity. Importantly, BAT’s innovation strategy focuses on “quality growth,” meaning it prioritizes profitable launches over sheer volume. New products are being rolled out in a targeted, data-driven manner to ensure high return on investment. This disciplined approach is already improving margins and helping scale New Categories more sustainably.

Support the Blog

I want to keep the blog free and accessible for everyone. If you enjoy the content and would like to support it, you can buy me a cup of coffee through PayPal. Every little bit helps and is truly appreciated!

Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 1.70, which is from the year 2024. I have selected a projected future EPS growth rate of 3%. Finbox expects EPS to grow by 3,2% in the next five years. Additionally, I have selected a projected future P/E ratio of 6, which is double the growth rate. This decision is based on British American Tobacco's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $3,39. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy British American Tobacco at a price of $1,69 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 12.676, and capital expenditures were 609. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 426 in our calculations. The tax provision was 447. We have 2.203 outstanding shares. Hence, the calculation will be as follows: (12.676 – 426 + 447) / 2.203 x 10 = $57,64 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With British American Tobacco's free cash flow per share at $5,48 and a growth rate of 3%, if you want to recoup your investment in 8 years, the Payback Time price is $50,19.

Conclusion

I believe that British American Tobacco is an intriguing company with capable management. The company has built a moat through its global scale, strong brand equity, regulatory expertise, scientific credibility, and early leadership in reduced-risk products. ROIC has been underwhelming since its large acquisition in 2017, but we have seen signs of improvement in the past two years. The company continues to generate strong free cash flow with a high levered free cash flow margin due to its capital-light business model and resilient tobacco operations. Regulation is a major risk for British American Tobacco because the company operates in over 180 markets with constantly evolving and often tightening rules on tobacco and nicotine products. These regulations can limit growth, reduce pricing power, and create legal and compliance risks, especially in newer categories like vaping where uncertainty and pre-market approval requirements add further complexity. Changing consumer preferences are also a risk, as younger generations are increasingly rejecting nicotine in all forms, not just cigarettes. This cultural shift could shrink the long-term market for both traditional and reduced-risk products, weakening brand loyalty and putting pressure on margins. Illicit products pose another challenge because they bypass regulation, avoid taxes, and offer cheaper, often flavored alternatives that attract consumers, particularly in the vapor category. This undermines legal market volumes and puts compliant companies like BAT at a disadvantage, especially in markets with weak enforcement such as the United States, Canada, and Australia. Despite these challenges, British American Tobacco’s combustible tobacco portfolio remains a key investment case because it generates strong, stable cash flow that supports dividends, debt reduction, and the company’s transformation strategy. Even with declining volumes, BAT maintains pricing power and market share, while strict industry regulations protect its position by making it difficult for new entrants to compete. The New Categories segment offers a clear path to long-term growth as cigarette use declines. With strong momentum in modern oral and vapor products, disciplined investment, and rising profitability, BAT is successfully building a more sustainable and consumer-relevant nicotine portfolio. Innovation further strengthens the investment case, as BAT has developed a focused, consumer-led pipeline that is driving growth and competitiveness across its new offerings. By prioritizing quality over volume and targeting premium segments with products like Glo Hilo, Vuse Ultra, and Velo Plus, BAT is expanding its share in the fastest-growing parts of the nicotine market. I believe there are things to like about British American Tobacco, especially for dividend-focused investors. However, this is not a sector I am personally interested in investing in, and therefore I will not be buying shares at this time.

My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how to do it, you can read this post.

I hope you enjoyed my analysis! While I can’t post about every company I analyze, you can stay updated on my trades by following me on Twitter. I share real-time updates whenever I buy or sell, so if you’re making your own investment decisions, be sure to follow along!

Some of the greatest investors in the world believe in karma, and to receive, you will have to give. If you appreciated my analysis and want to get some good karma and show your appreciation, I would kindly ask you to donate a bit to Safe Haven For Donkeys. It is an organization that helps donkeys in Israel and the Palestinian Territories. If you have a few bucks to spare and you enjoyed my writing, you would receive lots of good karma, if you would donate a little here. Every contribution matters no matter how little. Thank you.