RBC Capital Markets upgrades Imperial Brands, British American Tobacco

RBC Capital Markets upgraded Imperial Brands and British American Tobacco on Tuesday, arguing that they should prioritise share buybacks.

The bank said it’s hard to see how the tobacco sector can extricate itself from investors’ ESG penalty box.

"If institutional investors won’t buy the shares, the companies should use their plentiful free cash flow to do so instead," it said. "If they prioritised share buy backs, BAT and Imperial Brands could buy back their current market values in nine and seven years, respectively. Consequently, we raise our ratings to ‘outperform’ from ‘sector perform’ for both companies."

RBC said that while it expects organic sales growth to moderate in 2020 for BAT, mainly due to the Covid lockdown in South Africa and for Imperial Brands due to a decline in next generation products sales, it does not anticipate anything to suggest a permanently lower level of ongoing sales growth.

"What is more, the traditional volume/value trade-off seems to be intact," it said.

RBC lifted its price target on Imperial brands to 1,900p from 1,800p and on BAT to 3,200p from 2,700p.

At 1120 BST, BAT shares were up 3% at 2,702.62p and Imperial Brands shares were 2.9% higher at 1,380p.