British American Tobacco: Time To Take Profits? Assessing Growth and Risks

The tobacco giant British American Tobacco (BAT) has been on a roll, with its Q2 2025 update highlighting a rebound in its U.S. combustibles business, strong gains for its Velo Plus modern oral product, and renewed optimism around its New Category growth. But with shares up 15% year-to-date, is this a time to lock in gains, or does BAT still have room to run? Let's dive into the numbers.

The U.S. Combustibles Comeback: Sustainable or a Blip?

BAT's U.S. combustibles segment is back in growth mode after years of decline. The company stabilized its market share, with volume and value share each up 10 basis points (bps) year-on-year, excluding the deep-discount segment where BAT doesn't compete. Brands like Natural American Spirit and Lucky Strike drove this recovery.

Crucially, BAT's U.S. combustibles are now a profit engine again, contributing nearly half its global revenue. But here's the catch: the U.S. combustibles market is shrinking overall (-9% volume YTD), and BAT's gains are largely relative. Can it keep winning share in a contracting pie?

Velo Plus: The Modern Oral Star, But Risks Lurk

Velo Plus's success in the U.S. is undeniable. The product drove triple-digit revenue growth, boosting BAT's Modern Oral share to 11.9% (+550bps YTD). Globally, Velo commands 14.3% of total oral and 29.7% of modern oral markets in key regions like Scandinavia and Poland. This is a win for BAT's “Quality Growth” strategy, prioritizing profitable segments.

However, Velo's gains must offset headwinds in other New Categories. The Vapour segment (Vuse) saw a mid-teens revenue decline in H1 due to illicit products in the U.S. and Canada. BAT's H2 plan hinges on rolling out Vuse Ultra and glo Hilo (a heated tobacco product) to turn the tide. If these products underwhelm, New Category growth could stall.

Regulatory Overhang and Dividend Dependence

BAT's mid-term targets—3-5% revenue growth and 4-6% adjusted profit growth by 2026—rely on executing flawlessly. But risks loom:
1. Illicit Vapour: Until BAT proves it can reclaim share in the U.S./Canada Vapour markets, this remains a drag.
2. Regulatory Pressures: Excise tax hikes in Bangladesh and Australia hurt APMEA profits. New regulations (e.g., flavor bans) could further squeeze combustibles.
3. FX Headwinds: A 4% translational FX headwind for H1 and FY2025 complicates profit growth.

Meanwhile, BAT's dividend yield of 6.8% and a £1.1bn buyback in 2025 offer comfort to income investors. But if earnings stumble, this dividend—already covering 85% of free cash flow—could face pressure.

Valuation: Overpriced for Near-Term Catalysts?

BAT trades at 13.2x forward EV/EBITDA, a premium to its 10-year average of 11.5x. The market is pricing in success for its New Categories and U.S. combustibles turnaround. But with the stock up 15% YTD, are these expectations already baked in?

The company's mid-term targets require execution across multiple moving parts—Velo Plus dominance, Vuse Ultra success, and combustibles resilience. If even one stumbles, growth could disappoint.

Bottom Line: Take Profits, But Stay on Watch

BAT has compelling growth drivers, but the stock's valuation leaves little margin for error. The dividend is a key attractor, but I'd recommend taking partial profits here. Wait for confirmation of H2's innovation rollouts and Vapour recovery before doubling down.

Action Alert: Consider selling 25-50% of your position to lock in gains, then buy back if H2 results beat expectations. If New Category margins improve and Velo Plus share holds, this could be a steal at lower levels. For now, hold but don't chase—the risks are too high for a full sell, but the upside is limited at current prices.