TipRanks

Tue, Jun 24, 2025, 4:52 PM5 min read

Over the past year, British American Tobacco (BTI) has gained 51%, driven in part by investor demand for reliable dividend income amid growing expectations of lower interest rates. High-quality dividend payers, such as BTI, which has boasted 29 consecutive years of dividend increases, tend to perform well in such environments.

• Easily unpack a company's performance with TipRanks' new KPI Data for smart investment decisions

• Receive undervalued, market resilient stocks right to your inbox with TipRanks' Smart Value Newsletter

While the yield has decreased from a peak of 10% to 6.1%, primarily due to the share price rally, BTI’s strong fundamentals suggest further upside potential. Here’s a closer look at what continues to support the company’s momentum and why I remain bullish on the tobacco giant.

British American Tobacco’s core combustible business, which includes brands like Camel and Lucky Strike, remains a powerhouse. In this month’s 2025 half-year pre-close trading update, management reported a return to growth in the U.S., a critical market, driven by stronger delivery in combustibles. Organic sales for combustibles nudged up 0.1% at constant rates, with a 5.3% price/mix improvement offsetting a 5.2% volume decline. This resilience is a remarkable achievement for a “struggling” tobacco major, as combustibles still account for over 80% of revenue.

Despite global smoking rates dropping at a rate of mid-single digits annually, BTI’s ability to raise prices and maintain margins showcases its pricing power. Additionally, CEO Tadeu Marroco highlighted cost savings of £402 million in 2024, which will help counter inflationary pressures, such as higher leaf prices, making the strong sales seem all the more impressive. Overall, with the U.S. market showing signs of stabilization, combustibles continue to fund BTI’s transformation while delivering steady cash flows for dividends and buybacks.

BTI’s pivot to “new categories”, including vaping, heated tobacco, and oral nicotine products, is also gaining traction. The latest trading update highlighted an 8.9% organic revenue jump in these segments, with Velo Plus nicotine pouches leading the charge in the U.S. Management noted strong customer retention for Velo, which is closing the gap with Philip Morris’s Zyn. Meanwhile, Glo Hilo, an upgraded heated tobacco device, is expanding into new markets, boosting competitiveness.

Though new categories contribute less than 15% of revenue compared to Philip Morris’s (PM) 40%, BTI’s innovation is paying off, in my view. In fact, the company raised its 2025 revenue growth guidance to 1%-2% from 1%, citing better-than-expected first-half performance in modern oral products. The CEO’s confidence in achieving 3-5% revenue growth by 2026 suggests that BTI’s smokeless portfolio is no longer a side hustle, or a bet, as many would argue, but a meaningful growth driver.