"These strong results based on excellent organic growth continue to provide a solid platform for a sustainable business. Our consistent and balanced approach to the four elements of our strategy for creating shareholder value is working well."
Jan du Plessis, Chairman
British American Tobacco has had another good year, with 7 per cent growth in our underlying profit from operations and a 10 per cent increase in adjusted diluted earnings per share. The improvement in profit was driven by volume growth of 2 per cent and net revenue growth of 5 per cent. The impact of exchange rates for the year as a whole was not material, although it was significantly negative in the last six months, especially in the last quarter, and has continued into the current year.
Our Global Drive Brands were exceptionally successful, growing by 17 per cent. They now represent over 21 per cent of the Group’s volume from subsidiaries, while international brands as a whole account for some 40 per cent of the total.
Kent volume grew by 16 per cent to 45 billion, while Dunhill improved by 6 per cent, with encouraging performances both in its new and its existing markets. Lucky Strike grew marginally and the star, once again, was Pall Mall, up 40 per cent.
There were net exceptional charges of £175 million, reflecting the restructuring costs relating to the factory closure programme, partly offset by the gains on a disposal of brands. The annual savings from our supply chain programme in 2006 amounted to £148 million, bringing the total to £374 million per year since we started four years ago.
We also saved a further £99 million from the overheads and indirects programme, bringing that total over the same four year period to £355 million on an annualised basis. The current overheads and indirects programme will be completed in 2007. However, we intend to maintain our focus on costs and will be announcing a further five year target, along with the final results from the first five years, in March 2008. We will also pursue additional supply chain savings over the same five year period.
Our associate companies grew their volume by 4 per cent to 241 billion and our share of their post-tax results amounted to £431 million. This represents a 10 per cent increase, if exceptional items are excluded, reflecting higher profits from Reynolds American and ITC. The contribution from Reynolds American was £285 million, with the early results from the acquisition of the Conwood smokeless tobacco business being distinctly encouraging.
The improvement in profit from both subsidiaries and associates, together with a lower effective tax rate and the benefit of the share buy-back programme, more than offset the impact of higher net finance costs and minorities. As a result, adjusted diluted earnings per share rose by 10 per cent to 98.12p, just ahead of our long term goal of achieving, on average, high single figure growth in earnings.
By the close of business on 1 March, we expect that some 35 million shares will have been bought back since 1 January 2006 at a cost of £500 million and at an average price of £14.19 per share. Since 2003, when the buy-back programme started, around 246 million shares have been repurchased at a cost of £2,191 million, equivalent to an average price of £8.91 per share. We continue to view the purchase of our own shares as an excellent investment.
Following a review of the Group’s capital structure, the Board has decided that there is scope to increase significantly both the dividend payout ratio and the share buy-back programme.
The previous policy was to pay out at least 50 per cent of long term sustainable earnings in dividends, with the payout ratio in 2005 being 53 per cent. The Board has decided to raise the payout ratio to 65 per cent by 2008 in progressive steps and is therefore proposing a final dividend for 2006 of 40.2p, an increase of 22 per cent. This takes the total for the year to 55.9p, an uplift of 19 per cent and raises the dividend payout ratio for 2006 to 57 per cent. The dividend will be paid to shareholders on the Register at 9 March 2007. In line with our current practice, the interim dividend for 2007 will be approximately one-third of the total for 2006.
In addition, the level of the share buy-back will rise from around £500 million to some £750 million per year, starting in 2007. The increase in the buy-back programme is likely to mean that, before the Annual General Meeting in 2008, the combined interest of Richemont and Remgro (R&R) will rise above 30 per cent. Not only is this the level at which, under normal circumstances, an offer would have to be made by R&R for the remaining shares in British American Tobacco, but such an outcome is specifically prohibited by the existing agreement between R&R and the Company.
Following discussions with both the Takeover Panel and R&R, the Panel has indicated, subject to final approval, that it is prepared to waive the 30 per cent rule, if the independent shareholders approve such a waiver at the Annual General Meeting. This will allow the Company to continue the share buy-back programme, despite the fact that the R&R shareholding will increase above 30 per cent. The existing agreement restricting R&R’s voting rights to 25 per cent will remain in place.
R&R have given their consent to this proposal and in return have asked British American Tobacco to obtain a secondary listing for its ordinary shares on the Johannesburg Stock Exchange, if and when requested by them. British American Tobacco has agreed to this. The proposal will be put to the Annual General Meeting on 26 April for approval and the Board recommends the independent shareholders to vote in favour.
The Board does not anticipate that it would continue the buy-back once R&R’s interest had reached 35 per cent of the issued share capital of the Company. At the current share price, and at the proposed buy-back levels, this threshold is unlikely to be reached in the next seven years.
While the increased level of the share buy-back programme will create value for shareholders, it continues to preserve financial flexibility because it can be suspended in the event of an opportunity to make a significant acquisition that is both financially and strategically attractive in the longer term.
Rupert Pennant-Rea will retire from the Board at the end of the Annual General Meeting. I would like to thank him for the significant contribution he has made over the last 11 years, not only as a Director but also as Chairman of the Audit Committee.
2006 has been a good year and I believe we can look ahead with confidence in our ability to achieve further growth and value for shareholders. Over the past five years, British American Tobacco has delivered an average annual total shareholder return of 26 per cent, compared to 7 per cent for the FTSE 100.
Click here to view the Profit from operations data
Click here to view the Adjusted diluted earnings per share data
Click here to view the Group volumes data
Click here to view the Dividend per share declared data