BAT investors call on tobacco group’s new chief to restart share buybacks

Top investors in British American Tobacco are calling on the new chief executive to restart its share buyback programme in order to speed up the return of capital to shareholders and boost the cigarette maker’s ailing stock price.

BAT’s board surprised investors last week by announcing the immediate replacement of chief executive Jack Bowles, who had been in post since 2019, with finance director Tadeu Marroco. The FTSE 100-listed owner of Lucky Strike and Dunhill gave no reason for Bowles’ sudden dismissal.

However, industry insiders linked the decision with a $635mn penalty paid out to US authorities last month over historic North Korean sanctions busting.

They also highlighted the cigarette maker’s sluggish transition to vapes and heated tobacco products, which account for just a tenth of revenues, compared with more than a third of sales at rival Philip Morris International. Bowles has not been accused of any wrongdoing in the North Korea case.

Rajiv Jain, whose $98bn US-based investment firm GQG Partners is a top-five shareholder in BAT, told the Financial Times that the change in management was “a pretty bullish development” and called on Marroco to better communicate the company’s investment case to the market and “buy back stock in a much more aggressive manner”.

“They’re not telling the story of the pricing power that they have,” said Jain. “They need to get the story out right, which is that the business is in good shape, good upside, and the free cash flow generation is strong . . . but the free cash flow has to be given back to shareholders,” he added. “They should be buying stock hand over fist.”

BAT launched a £2bn share repurchase programme in February 2022 but opted not to renew it this year, during which the group’s share price has fallen 20 per cent.

Roseanna Ivory, an investment director at Abrdn, which is a top-15 shareholder in BAT, said: “Whilst we would like to see the reintroduction of the buyback, we are supportive of the company’s decision to de-lever faster given the rising cost of debt.”

She suggested that “a sensible time to think again about buying back its own shares” might be once BAT nears the middle of its net debt target range of two-to-three times earnings before interest, tax, depreciation and amortisation, which analysts expect the company to hit by the end of the financial year.

BAT declined to comment.

In contrast to BAT, rival FTSE 100 group Imperial Brands is retiring about 5 per cent of its equity as part of a £1bn share buyback programme running until September. In its half-year results earlier this month, it described the move as “a demonstration of our commitment to an ongoing and sustainable buyback”.

Meanwhile, Altria, which has the rights to sell the Marlboro brand in the US, announced a $1bn share repurchase programme earlier this year, adding to a total of $3.5bn worth of share buybacks in recent years.

Richard Marwood, senior fund manager at Royal London Asset Management, a top-15 investor in BAT, said that “while a share buyback would be supportive of the share price . . . getting the debt down in the near-term is probably more important”, following the company’s costly acquisition of US rival Reynolds American in 2017.

GQG’s Jain also reiterated his call for BAT to move its primary listing from London to New York, where peers command higher multiples and there is a wider pool of investors, arguing there was “no natural buyer” for the stock left in Europe.

Rae Maile, an analyst at Panmure Gordon, said BAT’s management had “never fully explained” why they did not press ahead with another round of buybacks from February this year.

“The tobacco model isn’t broken, it is still generating oodles of cash,” said Maile. “You’re invested in the industry because of its ability to generate cash and for the companies to return that cash to you. The cash generation has not gone away and therefore it would be a sensible expectation that the company would return to share repurchases soon.”

Eamonn Ferry, an analyst at Credit Suisse, argued that BAT had started the buyback programme “prematurely” when its net debt-to-ebitda ratio was close to three, creating the expectation of more buybacks among investors and putting the company in an “uncomfortable” situation when interest rates rose.