BRITISH AMERICAN TOBACCO (BATS) 2025 UK SHARE OUTLOOK

How did British American Tobacco perform in 2025?

British American Tobacco (LON:BATS) remained a focal point for income-seeking UK investors during 2025, given its robust dividend history and defensive market position. The company's share price closed the year slightly higher, with total returns bolstered by dividend payments, even as regulatory pressures and ESG concerns persisted.

Throughout 2025, BATS shares traded within a relatively tight range, experiencing moderate volatility compared to the broader FTSE 100 index. The share price began the year near 2,600p and hovered between 2,500p and 2,800p, ending the year around the 2,750p mark—representing a modest gain of approximately 5% year-on-year.

A significant driver of investor sentiment in 2025 was British American Tobacco's continued resilience amidst sector challenges. While global tobacco consumption continues to decline in developed markets, BATS offset volume reductions through pricing power, emerging market strength, and growing revenue contributions from its New Categories segment, which includes vapour, heated products, and oral nicotine lines.

Financial results highlight stable earnings

In its full-year 2025 results, British American Tobacco reported revenues of approximately £27.3 billion, reflecting low-single-digit organic growth. Operating profit remained stable, aided by cost-efficiency initiatives and reduced capital expenditure. Free cash flow exceeded £8 billion, supporting the group's commitment to shareholder returns.

Adjusted earnings per share (EPS) reached around 375p, in line with expectations. The company maintained a dividend payout of 235.5p per share in 2025, representing a dividend yield of over 8%, making BATS one of the most attractive high-yielding stocks on the London Stock Exchange.

Sector dynamics and macroeconomic factors

Several macroeconomic dynamics shaped performance in 2025. Persistent inflation, labour costs, and cautious consumer spending affected staple goods firms. However, the tobacco sector, being relatively inelastic, benefited from steady demand. The strengthened British pound and stable interest rate environment post-peak inflation further supported BATS's capital planning and international operations.

Moreover, as UK investors reevaluated defensive stocks against a backdrop of uncertain global growth, BATS attracted renewed interest for its steady income, mature footprint in regulated markets, and proven brand portfolio, which includes Dunhill, Lucky Strike, Rothmans, and Pall Mall.

Key milestones in 2025

• Product milestones: Expansion of Vuse and glo brands in Western Europe and Asia.
• Corporate developments: Continued debt reduction, bringing net debt to EBITDA ratio below 2.5x.
• Regulatory outcomes: Smooth implementation of new regulations in the US and UK, with limited market disruption.
• ESG Ratings: Minor improvement in ESG disclosures, though ratings from some agencies still flagged tobacco sector risks.

The company’s strategy to accelerate its transformation journey while maintaining strong cash generation helped it navigate 2025 with a balanced profile between downside protection and growth optionality.

What drove growth for BATS in 2025?

British American Tobacco’s performance in 2025 was underpinned by three major pillars: pricing strategy, geographic diversification, and its transformation towards non-combustible products. Each of these strategic components played a vital role in offsetting structural declines in traditional cigarette consumption.

1. Pricing strategy and premium positioning

While global cigarette volumes saw an industry-wide decline of approximately 2%-3%, British American Tobacco capitalised on its ability to pass through strategic price increases in core markets, including the UK, South Africa, and select Asia-Pacific countries. These pricing actions helped maintain revenue growth despite falling volumes.

The shift toward premium products also supported profitability. Stronger commercial execution of premium cigarette brands such as Dunhill and Kent created higher margins, more than absorbing the volume shortfall in some emerging markets.

2. Growth in New Categories

The New Categories division – consisting of vapour (Vuse), heated tobacco (glo) and modern oral products (Velo) – delivered double-digit revenue growth in 2025, now contributing over 15% of group revenue. Management reaffirmed its ambition to reach £5 billion revenue from New Categories by 2025, a target they are now within striking distance of.

Key success factors included:

• Strong Vuse brand traction in the UK and France, driven by product innovation and improved distributor partnerships.
• Heat-not-burn uptake in Japan, Romania, and Italy where glo compact performed well against competitors.
• Market expansion: New launches in emerging regions, particularly LATAM and parts of Africa, opened revenue opportunities.

The company invested over £1.5 billion into R&D and marketing in 2025 to support innovation in non-combustible portfolios, which are pivotal to its A Better Tomorrow strategy. This continues to resonate with younger demographics and regulators seeking lower-risk alternatives.

3. Operating efficiencies and debt control

Besides top-line growth, margin resilience was fuelled by operational cost savings. BATS advanced its procurement harmonisation project and shut redundant production lines, saving an estimated £250 million in costs.

Debt management remained a priority. During 2025, BATS reduced net debt by £1.7 billion, improving its leverage profile and credit standing. The stronger balance sheet provided optionality for future M&A and incremental shareholder returns.

Altogether, these strategic levers enabled BATS to sustain returns, maintain a generous dividend, and invest for future growth amid changing consumer preferences and evolving regulatory dynamics.

What should investors watch in 2026?

While British American Tobacco continues to position itself as a stable income stock with a transformational growth narrative, several risks and opportunities could shape the firm’s share performance in 2026. Investors should monitor both macro trends and industry-specific developments closely.

Potential headwinds in 2026

• Regulatory tightening: Governments, particularly in the UK, Australia, and parts of the EU, may increase restrictions on tobacco and vaping products. Potential flavour bans, tighter advertising rules, or product packaging mandates could restrict sales channels or raise compliance costs.
• US market exposure: BATS’s sizeable presence in the US via its acquisition of Reynolds faces FDA scrutiny, especially around menthol bans. Developments here could impact revenue and sentiment adversely.
• Litigation risks: Ongoing class-action lawsuits in the US and Canada, and controversial past dealings in Africa, may resurface as financial or reputational risks. Negative outcomes could weigh on stock valuation.
• ESG headwinds: Institutional investors may continue to divest from tobacco-related investments due to ethical constraints, impacting share demand and possibly funding metrics, despite BATS’s ESG improvements.

Tailwinds to monitor

On a positive note, several catalysts could aid performance further:

• New Category milestones: If BATS crosses the £5 billion revenue mark for alternative nicotine products in 2026, investor confidence in its transformation could increase significantly.
• Further debt reductions: Lower interest costs and stronger free cash flow could boost dividend growth or enable share buybacks.
• Emerging market expansion: Continued penetration into Asia, Africa, and Latin America may drive incremental sales, especially for modern oral and combustibles where regulation is less onerous.
• Increased R&D and product innovation: Offering improved product formats with reduced harm potential could win over new consumers and gain regulatory favour.

Analyst expectations and valuation outlook

Consensus estimates project stable earnings in 2026 with mid-single-digit EPS growth. Analysts expect the dividend to be maintained or slightly increased, contributing to an estimated forward yield of 7.8%–8.2%.

The stock trades at a relatively modest forward P/E ratio of around 7.5x, making it attractive on a valuation basis compared with consumer staples peers. However, valuation rerating potential remains capped unless ESG stigmas abate or New Categories deliver significant margin uplift.

Final word

British American Tobacco enters 2026 with a defensive core business, a growing stake in smoke-free alternatives, and strong cash flow dynamics. While not without its risks, particularly regulatory and reputational, it remains firmly on the radar of conservative, income-oriented investors in the UK.