British American Tobacco plc (LON:BATS) (BATS.L) has released 2017 results today, with its share price falling by 5% in response. The year was an important one for the business, with it successfully completing the acquisition of Reynolds. This made the combined company the world’s largest international tobacco company.
Of course, next generation products (NGPs) continue to be an important growth driver for the business. Last year saw the continued rollout and development in this product area. There was also a national rollout in Japan of the company’s tobacco heating product (THP), with it achieving a 3.6% national share.
British American Tobacco’s volume of cigarettes and THPs grew by 3.2%, but fell by 2.6% on an organic basis in 2017. This outperformed the market, which declined by 3.5%. On an adjusted basis, organic revenue grew by 2.9% at constant exchange rates, with this largely being down to pricing improvements and the performance of NGPs.
Looking ahead, I think the tobacco and nicotine industry will continue to experience major change. Tobacco volumes continue to fall and while there is the potential for further pricing increases due to the relatively inelastic demand for cigarettes, the growth potential for the long term appears to be in NGPs.
Therefore, the continued investment being made in the NGP arena by British American Tobacco could help it to deliver improving growth in future years. It is aiming to generate £5 billion in sales from NGPs by 2022, and this could have a very positive impact on its overall financial performance in my view.
While tobacco companies are clearly not for everyone, and some investors understandably have ethical concerns, I feel that from a purely investment perspective the company has appeal for the long run. Its dominant position in various markets across the globe could lead to relatively high returns in the coming years in my opinion.