A Record Year, Fully Priced

Reporting in sterling. Earnings per share quoted in pence. FY2025 = the year ended 31 December 2025. All figures from the supplied tear sheet (dated 260715), drawn from BAT’s FY2025 Annual Report and reconciled against the preliminary results released 12 February 2026.

British American Tobacco is one of the largest tobacco groups in the world — the owner of Dunhill, Kent, Lucky Strike, Pall Mall, Rothmans, Newport, Natural American Spirit and Camel, alongside a growing smokeless range. It is a colossal business: a market capitalisation of around £94bn, and even after a strong run the shares trade on a price-earnings ratio of only 12.4. It has not been expensively rated.

There are two halves to what BAT sells. First, the traditional Combustibles division — the cigarette brands listed above — which remains, by a wide margin, the largest revenue and profit source, with the United States still the single biggest region. Second, the smokeless range the group calls New Categories: Vuse vapour (e-liquids and battery-heated devices), Glo and Glo+ heated-tobacco products, and Velo nicotine pouches. The group has also moved adjacent to nicotine, taking a stake in the Canadian cannabis producer OrganiGram. On BAT’s own comparison, heated products emit far fewer toxins than combustion — the company cites 90% to 95% fewer — which is the public-health argument underpinning the smokeless pivot.

The turnover is going nowhere in a hurry, but the profitability and cash characteristics remain very good. Turnover slipped 1.0% to £25,610m — the third year of gently declining revenue — yet the gross margin held at 83.5% and the profit-on-turnover ratio reached an all-time high of 37.9%. This seems quite a remarkably high return on sales for a company that manufactures.

FY2025 vs FY2024

Operating and pre-tax profit shown on the underlying/adjusted basis for a like-for-like comparison; the reported figures were £9,997m and £9,859m (see Clarity box). The very large jump in reported post-tax profit and reported EPS is a base effect — it is measured against a badly depressed FY2024, not against a normal year.

The 2023 post-tax loss of £14,189m was not a trading collapse — operating profit that year was actually £12,465m, the highest of the six years. The loss was driven by a very large non-cash impairment charge against the carrying value of BAT’s acquired US combustible-cigarette brands. In late 2023 the group decided to treat those US brands (acquired with Reynolds American in 2017) as having a finite useful life of around 30 years and to amortise them, rather than carrying them as indefinite-lived intangibles. Writing the brands down to a lower value produced the headline loss, but no cash left the business as a result.

Cigarette volumes are forecast to decline only modestly over the medium term, but the mix is shifting: heated products and nicotine pouches are the growth categories, while combustibles slowly erode. Regulation has the potential to swing this — the UK’s proposed generational sales ban (prohibiting sales to anyone born after 2009), with several other countries evaluating similar systems.

Against that, BAT’s own smokeless numbers are not blindingly strong: vapour volumes fell 12.6% in 2025, with US group volume down 8.8%, blamed largely on illicit single-use vapes. The existing cigarette business, meanwhile, keeps holding up. It is a surprising picture given the atmosphere around the sector.

On the balance sheet, net borrowing has been grinding steadily lower — from £42,162m in 2020 to £31,578m on the tear-sheet basis in 2025 (reported borrowings including leases were £35,070m; adjusted net debt £30,416m). Falling debt, a modest buyback and a rising dividend are most of the shareholder return on offer.

Six-year record (£m unless stated)

The dividend row reproduces the tear-sheet history verbatim; note the FY2025 declared dividend is 245.04p per the primary filing (the 240.24p shown was the FY2024 payout). Net borrowing is on the tear-sheet basis; reported borrowings including leases were £35,070m.

This is a mature, extremely high-margin business that is struggling to grow its turnover and is unlikely to expand its already-excellent margins much further. It is slowly buying back stock — the share count fell around 1.3% between 2024 and 2025, which is meaningful if not stellar — and that concentration, plus a well-covered and rising dividend, is most of the shareholder return on offer.

I cannot see a convincing catalyst for earnings to compound much faster than 4% a year into the long term. The smokeless categories are not doing well enough to change that, and the cigarette business, while durable, is not growing. A great deal is already built into the price: the maturity of the market, the impossibility of a new entrant competing with these brands, the reliable cash generation. There is not, to my mind, a great deal of respect to be earned in owning it either. Cigarette companies are among the worst businesses morally to invest in, often marketing to a young audience, and their extensive reporting on community and environmental work sits uneasily against the product they sell.

I am valuing BAT on a normalised earnings basis rather than on either the distorted reported series or the record headline. I use an EPS of 351.00p — effectively the current basic/adjusted level, since the 2025 reported figure of 349.1p and the adjusted 352.1p sit either side of it — a modest growth rate of 4.0%, a conservative valuation multiple of 8.0x, no valuation uplift or reduction, and a risk factor of 20%. I hold a high probability on the company delivering these unspectacular figures, because the business is about as predictable as they come.

Valuation snapshot (MAEP, tear sheet 260715)

At an actual valuation of 3,706.56p against a market price of 4,382p, the shares are −15.4% too expensive on my numbers. The market is paying a premium I do not think the growth outlook justifies. There is nothing here that tempts me to buy, and given my reservations about the sector I am content to look no deeper for now.

• Regulation tightens faster than expected: A generational sales ban in the UK, and similar systems elsewhere, could accelerate the erosion of the combustible base that still funds most of the profit and the dividend.
• The smokeless pivot keeps disappointing: Vapour volumes fell 12.6% in 2025. If New Categories cannot grow into the gap left by declining cigarettes, the “4% forever” assumption could prove optimistic.
• Illicit product: Illegal single-use vapes are already blamed for US volume weakness — a hard-to-model drag on the legal market.
• Litigation and excise: The sector carries permanent legal and tax risk; a step-up in excise duty or a large settlement would hit cash generation directly.
• Currency and geography: With the US the single biggest region, sterling reporting adds translation risk to an already slow-growing top line.

• A cheaper entry point: The business is predictable; the issue is price. Closer to my 3,706.56p valuation the risk/reward would look very different.
• New Categories inflecting: Clear, sustained volume and margin growth in Vuse, Glo and Velo would justify a higher growth rate than the 4% I have used.
• Faster capital return: A materially larger buyback, funded by continued deleveraging, would lift the per-share compounding beyond what I currently assume.