Editor's Note: This analysis was originally published as a stock note by Morningstar Equity Research.

Key Morningstar Metrics for British American Tobacco

• Fair Value Estimate: GBX 4,000
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

British American Tobacco’s BATS shares were up 2% after reporting its first-half pre-close trading update. Improved performance in the modern oral category and US combustibles led the company to raise 2025 revenue growth guidance to 1%-2% from just 1% prior.

Why it matters: BAT has lagged its peers, reporting a little over 1% organic growth revenue and operating profit in 2024. US combustibles were a particular drag last year, so the return to growth in the first half is encouraging. Moreover, BAT looks poised to better perform in next-generation products.

The US launch of Velo Plus looks to help make some ground on the massive lead by wide-moat Philip Morris’ Zyn, with management pointing to promising customer retention rates after trying BAT’s products.

The continued expansion of glo Hilo into new markets should add further growth in the second half of 2025. An upgrade on the previous devices, glo Hilo should make BAT’s heated tobacco offering more appealing to consumers and competitive globally.

The bottom line: We maintain our fair value estimates of £40 and $51 for wide-moat BAT following the trading update, although we plan to revisit our valuation assumptions when full results are released after the first-half close.

Shares look undervalued as we think the market overly discounts BAT relative to global tobacco peers, especially Philip Morris. We think it underestimates the potential of the updated Velo and glo products.

BAT’s dividend yield remains around 6.6% despite shares rising nearly 20% over the past three months. Although we view BAT’s reduced-risk portfolio as lagging some of its peers, we think the dividend is safe and could be increased 5% annually.

Bulls say: We see potential upside for BAT’s Vuse vaping brand. The US and Canadian markets remain inundated with illicit flavored vapes imported from China, leading to a continued decline in the legal vaping market. Increasing government enforcement provides some potential to stop the bleeding.

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