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This stock may have received a raspberry from the market – but there is much to like


This column has had better weeks and British American Tobacco (BAT) was just one example of a portfolio pick to receive a bit of a raspberry from the market, when the company released its full-year results last week.

It is easy to see why the market gave the figures such a cool reception, and that is before taking into account any environmental, social or governance (ESG) factors, but there is much to like in them, too.

As a result, income seekers may still find the allure of a 7.4pc prospective dividend yield difficult to resist.

A drop in the stated operating margin, a small decline in statutory earnings per share and the absence of any fresh share buybacks may all have persuaded some investors to give the FTSE 100 stock a wide berth. Annual (cigarette) stick volume sales fell again, this time by 5pc to 605bn, to take the total decline over the past decade to 13pc.


The prospect of a shrinking business will chill many stock pickers and the decision on buybacks in particular could be a further deterrent. They are by no means the be-all and end-all, but buybacks work best when shares are cheaply valued, so the decision by chief executive Jack Bowles and chief financial officer Tadeu Marroco to halt them could be seen by some as a lack of confidence in the outlook.

However, the operating margin and earnings per share improved on an underlying basis, adjusting for costs related to the Russian and Belarusian operations and other one-off items.

Meanwhile, the combination of price increases and mix more than offset the ongoing global decline in stick volumes.

In addition, the Project Quantum restructuring programme continued to deliver handsome cost benefits and underpin free cash flow, which still comfortably covered the £4.9bn annual dividend, with the prospect of more to come, as BAT moved to rationalise its management and business structure, and even withdraw from certain geographic markets.

Momentum continues to gather in the New Category product range, too. The number of customers has all but trebled to 22.5m in the past five years and revenues have almost reached £3bn, with Vuse and glo leading the way.

As a result, BAT now expects New Category revenues to produce profits in 2024, one year earlier than expected (and indeed the operations could probably go into the black quicker still, but management is sensibly prioritising long-term strategy over short-term financial wins).

Finally, a proposed 6pc increase in the annual dividend will please yield-hunters, while the decision to pause the buybacks looks sensible. BAT carries £40bn of net borrowings on its balance sheet and interest rates are still rising.

It also has some £11bn in net debt due to mature in the next three years so focusing on cash generation ahead of repayment or rollover looks prudent. Less debt means less risk and less risk can mean a higher share price, all other things being equal. BAT remains a solid option for income-oriented portfolios.

Questor says: hold
Ticker: BATS
Share price at close: £31.25

Update: Zytronic

Smaller companies are often more exposed to cost and supply chain pressures, as they do not have the clout to stand up to larger suppliers, distributors and customers, and last week’s trading update from Zytronic makes it clear that the rugged screen maker is still having a tough time of it.

However, the company’s competitive position remains strong, since orders continue to come in, and a net cash pile of £6.8m provides ample support to the £13m market cap. We shall simply have to hunker down and wait.

It is so difficult for Zytronic to procure required parts that the Newcastle upon Tyne company is either paying premium prices or cannibalising finished, manufactured product so it can fulfil orders. Rising costs here and wage increases could impact earnings, especially in the second half of the current fiscal year from April to September.

It is therefore asking too much to expect earnings to rebound rapidly to past peaks of £4.6m from last year’s £611,000, but they do not have to do so for the shares to be cheap.

Average annual net income since 2000’s flotation is £1.6m so Zytronic trades on barely four times that, if you strip out the cash, while the stock also trades at a discount to net asset, or book, value. The cash and lowly price tag mean we can afford to await a positive catalyst.

Questor says: hold
Ticker: ZYT
Share price at close: 125p

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