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Analyst forecasts multi-billion share-repurchase program for BAT in 2022

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REYNOLDS AMERICAN

The ability of R.J. Reynolds Tobacco Co. to raise the list price on its traditional cigarette five times within a year may play a key role in supporting a share-repurchase program by parent company British American Tobacco Plc.

British American Tobacco Plc is primed to announce as early as February a share-repurchase program potentially worth at least $1.36 billion during fiscal 2022, an industry analyst predicted Wednesday.

BAT is the world’s largest publicly-traded tobacco manufacturer. Reynolds American Inc., its largest global subsidiary, has about 2,500 employees in Forsyth County at its U.S. headquarters.

The Barclays Global Staples team’s report for 2022 features a section from tobacco analyst Jain Gaurav.

“We believe BAT could announce a share-buyback program of ($1.36 billion) in February” based on its fiscal 2021 results, the report said.

BAT provided on Dec. 7 earnings guidance of 5% revenue growth for fiscal 2021, of which R.J. Reynolds Tobacco Co. had a major pricing and revenue influence.

BAT also maintained guidance of mid-single-figure adjusted earnings. The manufacturer, per British financial custom, issues only first-half and full-year financial reports.

Gaurav said once BAT initiates the share-repurchase program, he expects the manufacturer to “progressively step it up” to potentially $3.34 billion in 2022.

“With its strong cash flow generation, we estimate BAT could cumulatively do a share buyback of $13.5 billion by fiscal 2025.”

That’s on top of BAT’s lucrative quarterly dividend payouts to investors.

BAT’s board of directors declared for fiscal 2021 four equal quarterly installments of 75 cents per ordinary share, the final payout coming in February.

BAT maintains an annual policy of paying dividends valued at least at 65% of its adjusted profit. That payout was worth $10.26 billion in fiscal 2020.

Gaurav said “strong pricing provides considerable strength to BAT’s U.S. business.”

Reynolds raised its list price by 14 cents on Monday — the fifth such list-price hike in less than a year.

The list price is what wholesalers manufacturers pay for their traditional cigarette products. The increase typically is passed on to customers at retail.

Counting a 13-cent per-pack increase on Jan. 28, 14-cent per pack hikes in April and July and a 15-cent increase in October, Reynolds has raised its list price by 70 cents within a year for many of its top brands.

“Price increases in the past year are unprecedented,” said David Sweanor, an adjunct law professor at the University of Ottawa and the author of several e-cigarette and health studies.

“It is also a one-year increase in prices that amounts to roughly twice the cost of making a pack of cigarettes.”

The ability of Reynolds to have so many price hikes stick with consumers is helping BAT offset close to $1 billion in losses as part of establishing its innovative non-combustible nicotine and tobacco products.

Foremost among those products is R.J. Reynolds Vapor Co.’s Vuse, the No. 2 electronic cigarette in the U.S., but chipping away at top-selling Juul. BAT said Vuse has the top market share in 26 states.

BAT also includes in its new product category portfolio: Glo heat-not-burn traditional cigarettes; top-selling Camel Snus; and oral tobacco products Dryft and Velo.

“2021 is the pivotal year in our transformation journey to build A Better Tomorrow,” BAT chief executive Jack Bowles said in a Dec. 7 statement.

“Benefitting from a continued strong new category performance, which is now a sizeable contributor to group revenue growth, we are making excellent progress towards our ($6.62 billion) revenue target by 2025.”

Bowles said that “by leveraging our increased scale, new categories will contribute to profit growth for the first time as their losses start to reduce, a key step on our pathway to profitability by 2025.”

Part of Bowles’ optimism comes from BAT adding 3.6 million new consumers of non-combustible products through Sept. 30, which is more than it gained for all of 2020.

Gaurav said that “after peak losses in fiscal 2020, new category losses are now reducing and trending toward profitability.”

“With increasing scale, we believe BAT’s new categories can now start contributing to profit growth and drive BAT’s re-rating.”

Sweanor questions how quickly that BAT will turn a profit on non-combustible products.

“While there is on-going optimism that they can eventually make money from lower-risk products, to date that has not happened. The market has moved too fast,” Sweanor said.

“The regulatory system continues to give a huge incentive to focus on cigarettes.

“The existential threat from competition from low-risk products that has whacked cigarette companies’ share prices gives an opportunity to change the industry,” Sweanor said. “If only that opportunity can be seized rather than squandered.”

Richard Craver: 6 stories that defined 2021

COVID-19 and politics, whether local, state or national, spilled over from 2020 to saturate much of how 2021 has been defined.

The second impeachment trial of former President Donald Trump led to an intriguing split vote of North Carolina's two Republican U.S. senators on whether to convict.

The arrival of the one-year anniversary of the pandemic proved to stir an array of emotions as local residents tried to process everything that’s happened by mid-March 2020 ... and continues to date.

The socioeconomic spillover from COVID-19 persuaded two Winston-Salem nondenominational churches to chose transformation over construction for their new worship centers.

Politics seeped into how high school sports are overseen with a Republican-sponsored bill that threatened the existence of the N.C. High School Athletic Association. The spark behind House Bill 91 appears to have been a slow burn of nearly two years between a GOP senator and NCHSAA leaders.

An often overlooked factor in the worker-shortage discussion is that the pandemic has led more North Carolinians to retire early, or to finally follow through on delayed retirement plans dating back potentially to the Great Recession.

Finally, Truist Financial Corp. Kelly King retired as chief executive by reflecting on a career — and life — path that represented his Christian faith, a hard-driven work ethic, a belief in giving back and discovering and acting on a purpose forged during a spiritual awakening.

Those are major reasons why King, who could spend his retirement days anywhere, is coming back to Winston-Salem. There’s some unfinished business to accomplish here.

336-727-7376 @rcraverWSJ

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