British American Tobacco's FY 2025 Outlook: Leveraging Innovation and Financial Discipline to Lead the Shift to Modern Nicotine

The global tobacco industry is undergoing a seismic shift, driven by regulatory pressures, evolving consumer preferences, and the rise of reduced-risk alternatives. Amid this transformation, British American Tobacco (BAT) has positioned itself as a leader in the transition to modern nicotine delivery systems. With its FY 2025 outlook, BAT is poised to capitalize on accelerating growth in its New Categories—particularly Modern Oral (Velo Plus) and Heated Products (glo Hilo)—while maintaining financial discipline to offset combustibles headwinds. This strategic duality creates a compelling investment thesis for 2025 and beyond.

New Categories: The Engine of Growth

BAT's New Categories—smokeless products such as nicotine pouches, heated tobacco, and premium vapor—now account for 17.5% of Group revenue, up from 16.5% in 2023. This segment's 8.9% organic revenue growth in 2024 underscores its role as the company's growth driver. For FY 2025, management expects New Categories to deliver mid-single-digit revenue growth, with Velo Plus and glo Hilo spearheading this momentum.

Velo Plus, BAT's flagship Modern Oral product, has already demonstrated exceptional traction. In the U.S., its launch has driven a +550 basis point increase in Modern Oral volume share to 11.9%, with triple-digit revenue growth in the first half of 2025. The product's success stems from superior taste, convenience, and a focus on premium consumer experiences.

Meanwhile, the glo Hilo platform—designed to counter competitive pressures in Japan and recover share in key markets—is gaining traction. Early trials in Serbia saw doubled trial-to-conversion rates, signaling strong potential for global expansion. BAT plans to roll out glo Hilo across Europe and Asia in H2 2025, targeting markets where heated products are gaining regulatory acceptance.

Offsetting Combustibles Declines with Strategic Focus

The combustibles segment faces structural headwinds, with global industry volumes projected to decline by ~2% in 2025. BAT's combustibles volume dropped 9.0% in 2024, driven by the sale of Russian and Belarusian businesses and a 10.1% U.S. volume decline. However, robust pricing (+5.3% price/mix) and portfolio optimization have stabilized revenue.

BAT's focus on Quality Growth—prioritizing high-margin markets and premium brands—has mitigated these challenges. In the U.S., Natural American Spirit and Lucky Strike have gained share in the natural and craft cigarette segments, while Vuse Ultra, a new premium vapor product launching in H2, aims to counter illicit competition in the U.S. and Canada.

Financial Discipline: Deleveraging and Shareholder Returns

BAT's financial strategy is equally compelling. The company aims to reduce its leverage ratio to 2.0–2.5x by end-2026, supported by £7.9 billion in 2024 free cash flow and a £1.1 billion share buyback in 2025. Additionally, a 2.0% dividend increase to 240.24p underscores management's commitment to rewarding shareholders.

Crucially, New Category contribution margins have improved to 7.1% in 2024, up 7.1 percentage points year-on-year. This margin expansion, driven by cost savings and operational efficiency, is expected to accelerate in 2025. The “Quality Growth” strategy—allocating resources to high-profit segments—will further bolster margins, even as the company invests in innovation.

The H2 Inflection Point: Innovation Drives Acceleration

H2 2025 is a critical period for BAT's execution. The roll-out of glo Hilo and Vuse Ultra, alongside continued Velo Plus momentum, positions the company to achieve its FY 2025 guidance of 1–2% revenue growth and 1.5–2.5% adjusted profit growth. By Q4 2025, New Category revenue growth could reach double digits, excluding the drag of illicit markets in the U.S. and Canada.

BAT's mid-term targets are equally ambitious: 3–5% revenue growth and 4–6% adjusted profit growth by 2026. These goals are achievable given the company's £1.2 billion cost-saving commitment by 2025 and its ability to convert strong cash flow into shareholder value.

Why Invest Now?

BAT is uniquely positioned to thrive in a fragmented, evolving market. Its dual focus on innovation and financial rigor creates a moat against competitors and regulatory risks. Key catalysts for outperformance include:
- H2 2025 product launches driving New Category growth.
- Margin improvements from cost discipline and premium product focus.
- Deleveraging progress supporting buybacks and dividends.

Conclusion: A Compelling Buy at Current Levels

BAT's FY 2025 outlook is a testament to its ability to navigate disruption while capitalizing on secular trends. With New Categories now contributing nearly a fifth of revenue and margin expansion on the horizon, the company is primed for sustained outperformance. Investors seeking exposure to a tobacco giant undergoing a disciplined transformation should act now—BAT's stock offers a rare blend of growth, stability, and shareholder-friendly policies.

Recommendation: BUY BAT shares with a 12–18 month horizon, targeting mid-single-digit annual returns driven by innovation-led growth and margin expansion.

Data sources: BAT's 2024 Annual Report, First Half Pre-Close Trading Update, and 2025 outlook statements.