Citi ups target on British American Tobacco, eyes shift in dividends to US dollars

Analysts at Citi trimmed their medium-term earnings estimates for British American Tobacco modestly but reiterated their 'buy' recommendation on the shares following a meeting with its chief.

Adam Spielman reduced his estimates for the company's earnings per share by 3% for 2017 and a further 4% for 2018 and 2019 as a result of foreign exchange headwinds, with half of that coming from changes in the pound- US dollar exchange rate.

'Cable', the monicker used by currency traders to refer to the Sterling-dollar rate, accounted for nearly half the downwards EPS revisions, with fluctuations in the currency pair set to factor more heavily in the firm's financials after its merger with Reynolds, Spielman said.

Nonetheless, Spielman said he came away "enthusiastic" on the prospects for the outfit's core business after meeting with its boss.

The acquisition of Reynolds was running on schedule and may deliver revenue synergies, he said.

As as aside, Spielman said he wouldn't be surprised if the company began reporting (and setting dividends) in US dollars.

On the back of the above and reflecting recent increased multiples in consumer, the analyst said he was now targeting a forward price-to-earnings multiple of 20 and raising his target price to 600.0p.

"We continue to think BAT is a highly attractive investment, with 4-5% organic sales growth and effectively a free option on heat- not-burn."