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BAT’s Buyback Plan Falls Short of Analyst Expectations

British American Tobacco Plc, Europe’s largest cigarette maker, plans to resume buying back shares after a two-year break caused by the recession.

The maker of Lucky Strike cigarettes will seek to repurchase 750 million pounds ($1.2 billion) of stock in 2011, it said today. London-based BAT bought back shares from 2003 to 2008, before suspending the program in 2009.

BAT fell as much as 3.4 percent in London trading as some analysts expressed disappointment at the scale of the buyback, which is smaller than rivals such as Philip Morris International Inc. David Hayes at Nomura had estimated the company may repurchase more than 1 billion pounds of stock. BAT’s free cash flow increased by 23 percent to 3.24 billion pounds in 2010.

“The size of the buyback is less than we thought they could do,” said Erik Bloomquist, an analyst at Berenberg Bank in London with a “buy” rating on BAT. He estimates the buyback will boost the company’s earnings per share about 2 percent.

BAT shares dropped as much as 81 pence to 2,332 pence and were down 2.2 percent at 2,360 pence as of 11:31 a.m.

The buyback is the equivalent of a 1.6 percent stake based on a market value of 47.2 billion pounds, Bloomberg calculations show. Philip Morris, the New York-based maker of Marlboro cigarettes, said on Feb. 10 that it plans to buy back $5 billion of stock in 2011, the equivalent of a 4.4 percent stake.

Acquisition Plans

“We like to keep a little bit of firepower available for any tuck-under acquisitions that are out there, so we keep an eye on that,” Chief Financial Officer Ben Stevens told analysts at a meeting in London available via BAT’s website.

The maker of the Dunhill and Kent brands is studying several smaller acquisitions, he said, adding that BAT doesn’t expect any “major industry consolidation” in coming years.

Productora Tabacalera de Colombia Protabaco Ltda., a Colombian cigarette maker, is a possible target for BAT, according to Giulio Lombardi, an analyst at Fitch Ratings. Philip Morris on Jan. 5 abandoned an agreement to buy the Colombian company for $452 million. Michael Prideaux, a spokesman for BAT, declined to comment on Protabaco.

BAT said net income climbed to 2.88 billion pounds in 2010. Adjusted earnings per share, which exclude reorganization costs, trademark amortization and impairment, goodwill impairment and capital gains, rose 15 percent to 175.7 pence, beating the 174.3 pence average estimate of 18 analysts compiled by Bloomberg.

Higher Prices

Revenue rose 4.8 percent to 14.88 billion pounds, less than the average analyst estimate of 14.97 billion pounds.

BAT said it boosted sales growth by about 6 percentage points through higher prices and more expensive brands to offset a drop in consumption and higher government levies. Japan increased taxes by a record 40 percent at the start of October, while cigarette tax rose 29 percent in Turkey at the end of 2009 and 25 percent in Australia in April.

The global market for cigarettes excluding China, which is largely closed to foreign tobacco companies, will probably shrink by 2.5 percent in 2011, said Nicandro Durante, who will become chief executive officer when Paul Adams retires at the end of this month. BAT’s volumes should be a “little bit better” than that as its brands gain market share, he said. BAT also has “good momentum” in pricing this year, he said.

The operating margin rose to 33.5 percent in 2010 from 31.4 percent in 2009. BAT has a goal of reaching 35 percent by 2012 and will set a new target for its operating margin if it reaches that objective early, CFO Stevens said.

Australia will probably introduce legislation requiring cigarettes to be sold in packages without brand imagery and logos in 2012, Adams said on the company’s web site. The move would reduce competition in the country, where BAT has a 42 percent market share, he said.

BAT also said today that it plans to pay a final dividend of 81 pence a share, raising the total dividend payment for the year by 15 percent to 114.2 pence a share.

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