British American Tobacco: Affirmed

“Our financial flexibility continues to improve, and we are on track to deliver more than GBP 50 billion in free cash flow by the end of 2030. We continue to focus on the deleveraging, and we expect to be within our target 2 to 2.5x adjusted net debt to adjusted EBITDA range by year-end. As we transform, I remain committed to delivering sustainable shareholder returns through our progressive dividend, which dates back 27 years, and a sustainable share buyback program.” - Tadeu Marroco, BAT CEO, H1’26 Pre-Close Remarks

I recently joked that, for the nicotine industry, this reporting period may remain rather dull, if not uneventful. As surprises are not necessary and often unwelcome in this space, such would be just fine. While British American Tobacco’s Pre-close statements do not provide hard numbers, the 2026 First Half Trading update delivered exactly that. The associated 51-minute presentation, although dreadfully long for a pre-close update, pleasantly affirmed the group’s strategy. Even more pleasant was how those points were communicated. Management did not stray from discussing triumphs and challenges alike.

The most prominent difficulty concerns BAT’s heat-not-burn business. New iterations of glo continue to be scaled across markets, but the promise of improved financial contribution has again been kicked down the road. Market share has not been easy to gain, and has proven equally hard to defend. The group has signaled greater focus in how it is growing the franchise, but make no mistake: this is no IQOS.

The group’s vapor line, Vuse, is a mixed bag, depending on the geography you look at. Weakness in AME is no surprise, following the regulatory changes in the UK. Conversely, Vuse in the U.S. appears quite strong, as more states enact product registries and federal actions continue to curb the availability of illicit products.

BAT’s standout success in NGP categories remains firmly in modern oral. Although it is still only a small component of revenues, the trajectory of the category and the group’s portfolio warrant attention. The very same regulatory changes in the UK that are a headwind for vapor are a tailwind for pouches. Outside the U.S., Velo continues to demonstrate its leadership position. In the U.S., Velo (and let’s not forget Grizzly, too) has unrelentingly captured disproportionate gains. Not even two years in, and both its volume and value share are sights to behold.

Excitement surrounds Velo Max, set to appear in the U.S. around August or September. However, there is a caveat for the U.S. market: the FDA’s recent Guidance for Industry. It is true that BAT holds influence and remarkable distribution, but the competitive landscape is set to transform.