BAT may return cash to investors as profits dip 1%

British American Tobacco clung to its forecast for high single-figure earnings growth yesterday despite revealing that it had taken a "considerable" hit from weaker foreign currencies.

BAT reported a 1 per cent fall in pre-exceptional operating profit for the nine months to end-September to £2.06m, affected by a £107m currency impact. But the tobacco giant said that excluding the effect of weak currencies – most notably the US dollar and the South African rand – its underlying operating profit had risen by 4 per cent.

While analysts were relieved that BAT had not revised down its targets, there was some disappointment at the lack of news on the acquisition front.

The group has said that although it remains keen to do a deal it will return its cash pile – estimated at up to £3.5bn – to shareholders when its interest cover tops nine times. Yesterday it said interest cover had reached 8.6 times.

Paul Adams, the managing director, said that in China, where it has signed an agreement to build a factory in Sichuan province, "negotiations continue and continue to make progress". While he said the group remained optimistic that it would strike a deal with its Chinese partners, he added: "We are so sensitive to their needs and sensitivities that we are going to go quiet on that."

BAT said it would increase its marketing budget in the US in the fourth quarter to counter a hike in promotional spending from rivals Philip Morris and RJ Reynolds. Mr Adams said sales at its Brown & Williamson subsidiary, which contributes roughly 15 per cent of its earnings, were "softening slightly, but nothing dramatic".

For the three months to 30 September, pre-tax profits rose by 3 per cent to £608m, while for the nine months they were up 7 per cent at £1.63bn.

Analysts expressed concern that earnings growth was being driven by lower interest costs and a favourable tax rate.

Michael Smith, at JP Morgan, said: "I think this probably means people will be sceptical about the ongoing quality of earnings growth and the sustainability of the earnings growth."