British American Tobacco (BATS.L) has announced its intention to divest some of its shares in India’s ITC, indicating a shift towards resuming share buybacks.
This announcement led to an almost 8% surge in its shares, reflecting investor optimism.
The decision to sell some of its holdings in ITC comes after BAT’s previous strategy of prioritizing debt reduction and investment in new products over initiating a new buyback program disappointed investors.
With approximately 29% stake in ITC, the move aims to alleviate pressure, allowing BAT to reduce debt and potentially reengage in share buybacks.
ITC, a significant player in India’s consumer goods sector, generates a substantial portion of its revenue from cigarettes, alongside its operations in hotels and paper businesses.
BAT’s endeavor to sell its stake in ITC is seen as a strategic move to expedite debt reduction and regain financial flexibility for buyback initiatives.
BAT’s CEO, Tadeu Marrocco, emphasized the complexity of the process, indicating uncertainty regarding the timing of the stake sale.
Acknowledging the importance of maintaining influence, Marrocco highlighted that retaining a 25% stake in ITC is necessary for veto rights.
This statement underscores BAT’s intention to strike a balance between divesting its holdings and retaining decision-making power within ITC.
The market responded positively to BAT’s announcement, with analysts welcoming the reaffirmation of the dividend, which saw a 2% increase compared to the previous year.
Chris Beckett from Quilter Cheviot expressed relief regarding BAT’s dividend stability and the potential for future buybacks, which had previously dampened investor sentiment.
BAT’s shares rose by 7.1% following the announcement.
High dividends and share buybacks are key factors in attracting investors to tobacco companies, known for their strong cash generation.
Additionally, BAT reported a 5.2% increase in adjusted diluted earnings per share, slightly surpassing analyst expectations, further contributing to the positive market response.