BAT Upgrades Smokeless Targets, Yet Shares Slide on Accelerated Tobacco Decline and Lowered Guidance Range

British American Tobacco's half-year update shows faster cigarette volume erosion and low-end guidance, despite raised smoke-free forecast. Stock drops 4.3%.

The market delivered a contradictory verdict on British American Tobacco’s half?year trading update on Tuesday. While management raised its growth forecast for smoke?free products, investors focused on the darker side of the ledger: a faster?than?expected erosion in cigarette volumes and guidance that points to the bottom end of the full?year range. The stock fell 4.3% in London to 4,384 pence, and on the Frankfurt exchange it slipped 2.4% to €51.32.

Behind the sell?off lies a clear disconnect. The company now expects its smoke?free segment — led by Vuse vaping products and Velo nicotine pouches — to deliver revenue growth in the mid?teens for both the first half and the full year of 2026, up from the previous low?double?digit forecast. Velo has posted strong gains in revenue and contribution margin, while Vuse retains its global value?share leadership, underpinned by resilient US sales. The improvement partly reflects a shift in the regulatory landscape: the US Food and Drug Administration has signalled an “enforcement discretion” approach for certain nicotine products, giving BAT more room to launch new offerings. Smoke?free currently accounts for about 18% of group revenue, and the company has set a long?term target of 50% by 2035.

Yet the legacy cigarette business continues to weigh on sentiment. BAT now projects that global industry cigarette volumes will contract by roughly 2.5% in 2026, versus a prior estimate of 2%. The accelerated decline is most pronounced in Asia?Pacific and the Middle East, where recovery has been slower than hoped. The company also lost 30 basis points of cigarette market share across its key global markets. The damage was somewhat contained in the US, where both cigarette and nicotine product sales proved more resilient.

Management reaffirmed its full?year guidance for 2026 but signalled that outcomes are likely to land at the lower end of the target bands. Organic revenue is expected to rise 3–5%, adjusted operating profit 4–6%, and diluted earnings per share 5–8%. For the first half of the year, BAT posted an adjusted pre?tax result of approximately £4.76 billion. The earnings weighting will tilt toward the second half. Meanwhile, the £1.3 billion share buyback programme remains in place, and the operating cash?flow conversion rate stands above 95%.

Adding to the financial drag is the Canadian settlement agreement worth £6.2 billion, which continues to weigh on long?term profit expectations.

Analyst opinions remain sharply divided. RBC’s James Edwardes Jones sticks with an “underperform” rating and a 3,600 pence price target, arguing that investors are pricing in volume growth from smoke?free products while ignoring the margin dilution these categories bring compared with traditional cigarettes. Jefferies’ Andrei Andon?Ionita takes the opposite view, maintaining a “buy” recommendation with a 5,200 pence target and pointing to the strong momentum behind nicotine pouches.

Despite Tuesday’s drop, the stock remains about 9% below the 52?week high of €57.18 set in mid?May, and is still up roughly 32% year?to?date, reflecting sustained confidence in the broader transformation story. The next major catalyst will come with the full half?year results on 30 July, followed by a Capital Markets Day at the end of September, where management is expected to flesh out the road map from tobacco giant to a smoke?free?focused enterprise.