British American Tobacco Plc, Europe’s largest cigarette maker, said it will step up a buyback program this year by repurchasing 1.25 billion pounds ($2 billion) of shares after profit rose 11 percent in 2011.
Directors of the Lucky Strike maker approved an extension of the buyback after BAT spent 750 million pounds repurchasing stock last year, the company said today in a statement. BAT also raised the dividend by 11 percent to 126.5 pence a share.
The tobacco company resumed the buyback program last year after a two-year break caused by the recession. About 94 percent of free cash flow will be returned to shareholders this year through dividends and share repurchases, spokesman Michael Prideaux said. Cash flow increased by 3 percent in 2011 to 3.33 billion pounds, BAT said today.
“It’s a surprise to me, as I was expecting a renewal of 750 million,” said Martin Deboo, an analyst at Investec Securities. “Yet despite distributing all the cash they’ve got, it’s not enough to get the share price up and raises the question of how much further tobacco stocks can go.”
BAT fell as much as 1.1 percent in London trading and was down 0.5 percent at 3,117 pence as of 9:06 a.m. The stock has gained 29 percent in the past year, compared with the Bloomberg Europe Tobacco Index’s 28 percent advance.
‘Strong Balance Sheet’
The proposed buyback is the equivalent of a 2 percent stake based on a market value of 61.5 billion pounds, according to Bloomberg calculations. Competitor Philip Morris International Inc. said Feb. 9 it would repurchase as much as $6 billion this year, or a 4.2 percent stake.
“We thought that in the current economic climate we could do this buyback and keep a strong balance sheet,” BAT’s Prideaux said.
Adjusted operating profit climbed to 5.52 billion pounds in 2011 from 4.98 billion pounds in 2010, the London-based company said today. The average estimate of 11 analysts surveyed by Bloomberg was for operating profit of 5.51 billion pounds.
BAT, led by Chief Executive Officer Nicandro Durante, has pushed into developing markets in Asia and Latin America to mitigate declining consumption in the Americas and higher government levies as countries discourage smoking. In October, the company acquired Productora Tabacalera de Colombia SAS to become the second-largest tobacco seller in the country.
“BAT is an attractive indirect emerging-market play and benefiting from favorable trends in terms of volume and pricing,” Rogerio Fujimori, an analyst at Credit Suisse with an “outperform” recommendation, wrote before the release.
BAT’s operating margin widened to 35.8 percent of sales from 33.5 percent in 2010, compared with the company’s forecast of at least 35 percent. BAT has boosted margins by cutting costs and raising prices in countries including Brazil, Mexico and South Korea. David Hayes, an analyst at Nomura, estimates an operating margin of 37 percent in 2012, he said in a note today.
Emerging markets such as Brazil now account for about three-quarters of total volume, up from 50 percent a decade ago, and 60 percent of operating profit, Prideaux said. BAT sees more acquisition opportunities in developing markets, he said.
Revenue rose 3 percent to 15.4 billion pounds, the Dunhill maker said. Analysts expected 15.5 billion pounds, on average. Overall cigarette volume declined 0.4 percent, while the company’s so-called global drive brands -- Kent, Dunhill, Lucky Strike, and Pall Mall -- boosted volume by 9 percent.
“The most important thing is that the global drive brands continue to increase as a proportion of overall volume,” said Chris Wickham, an analyst at Oriel Securities who recommends holding the shares. “Those brands are really going.”