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Summary
- British American Tobacco Plc has come out with a tender offer to the holders of debt instruments issued by its subsidiaries
- The company had free cash flow - before payment of dividends of £397 billion at first half ended 30 June 2020.
- Earlier the company had announced an interim dividend of 210.4 pence per share, making it among one of the very few to be paying dividends this year, in a market deeply battered by the pandemic
One of the well-performing FTSE 100 companies on the London Stock Exchange, British American tobacco has come with a tender offer to buy back debt instruments issued by its wholly owned subsidiaries. These instruments which have yet to achieve their maturity will be extinguished using the company’s strong cash position, lightening its balance sheet. The move by the company also indicates that the company does not have any large capital outlays planned for this year, hence choose extinguishment of unmatured debt as the most productive deployment of the cash it holds.
In February this year the company had declared an interim dividend of 210.4 pence per share to be paid in four equal instalments through 2020 and 2021 (of 52.6 pence per share in May 2020, in August 2020, in November 2020 and in February 2021 each), whereas most other companies in the country had either cancelled or slashed their dividend payments for the year. The company had managed to stay in the green this year despite the adverse effects of the coronavirus pandemic and its results published for the first half of 2020 showed its revenues marginally higher this year compared to the revenues for the first half of 2019.
The finer points of the tender offer
The company has tendered for the debt securities issued by three of its subsidiaries. For BAT International Finance Plc it has tendered $267.6 million from the $500 million offered under the 3.5 per cent guaranteed notes due in 2022. $481.4 million of the $900 million in 3.25 per cent guaranteed notes due 2022, and £102.9 million from the £250 million in 6.00 per cent guaranteed notes due for the year 2022.
For BAT Capital Corp, BAT Plc will purchase $1.65 billion from the $2.25 billion offered under the 2.764 per cent notes due for the year 2022.
For its third subsidiary Reynolds American Inc, BAT plc would be tendering $90.2 million from the $158.5 million in 3.25 per cent notes due 2022, and €228.3 million from the €600 million offered under the 3.625 per share notes due 2021.
Deutsche Bank Securities Inc, Goldman Sachs & Co LLC, and BofA Securities Inc have been appointed by the company as the dealer managers of this offer.
The strong financial position of British American Tobacco
The company on 31 July 2020 came out with its first-half results for the FY20. The revenue earned by the company for the reported period stood at £12.271 billion compared to £12.170 billion reported for H1 2019, registering a growth of 0.8 per cent. The profit from operations reported by the company for the reported period stood at £5.097 billion, whereas for H1 2019, the reported profit from operations was of £2.894 billion. The profit for the period has been reported by the company at £3.538 billion, while in H1 2019 it was at £2.894 billion. The basic earnings per share of the company for the first half was at 151.2 pence per share whereas for H1 2019, it stood at 123.2 pence per share. The company had free cash flow - before payment of dividends of £2.397 billion for first half ended 30 June 2020.
The pandemic impact on companies’ dividend in the UK
The outbreak of the coronavirus in the UK and the subsequent lockdown made the operating environment very volatile for most of the companies in the country. A sudden drop in revenues resulted in major cash crunch creeping in into most businesses, leading them to curtail their non-essential expenditures. Most companies facing the uncertainty on how the pandemic situation would pan out over the next few months, either cancelled or reduced their dividend for 2020. BATS was one of the few exceptions which did not reduce or cancelled its declared dividend for the year.
For the rest of the year 2020, the overall situation is unlikely to improve much. The threat of a resurgence of the pandemic in the UK and other parts of Europe will make companies even more wary of the operating environment and their financial position. Only when an effective vaccine becomes available and mass inoculation starts, then only confidence level can be expected to return, and the economy could be back on track, and the companies restart to declare dividends.
The share price performance of British American Tobacco Plc (LON: BATS) since the beginning of the year
(Source – Thomson Reuters)
The shares of the company started the year 2020, trading in the green, but since the beginning of February when the news of the widespread outbreak of the virus began to trickle, the shares prices started to fall sharply. Into the month of March, they bottomed during the time the lockdown was imposed in the UK.
The shares of BATS have recovered since but have still not reached the levels where it started the year with. As on 8 October 2020 (11.40 AM GMT+1) the shares of British American Tobacco Plc have been trading at GBX 2,727.50 per share, losing 0.47 per cent over previous day’s close.
