BAT signals confidence with dividend boost

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British American Tobacco signalled confidence in its growth prospects by raising its interim dividend 10 per cent yesterday, despite reporting a 25 per cent fall in profits.

The world's second-biggest cigarette maker also fended off accusations that it had overpaid in its recent €2.35bn (£1.65bn) purchase of Italy's ETI. It said buying ETI would boost its earnings in 2004 and save it €35m a year by 2007.

Martin Broughton, the chairman, said he was "bewildered" that Altadis, the Franco-Spanish group also seeking to buy ETI, had bid so low. "We bid conservatively against what we considered the business was worth to us."

He said BAT was still on the acquisition trail and would "study carefully" the imminent privatisation of Turkey's national cigarette company. "Tekal is a big market opportunity but a big headache [for the buyer]," he added. BAT is also one of two bidders vying to acquire two state-owned businesses in Serbia.

Mr Broughton said BAT's shareholders were split 50:50 over whether they would back an acquisition in the US ­ such as RJR Reynolds ­ which would increase the group's exposure to litigation risks. "We would be willing to make acquisitions in the US ... but we would have to question very carefully if we did something shareholders wouldn't want us to do," he said.

Mr Broughton added: "The threat of class action against the tobacco industry [in the US], which has concerned investors, is receding fast."

The company said a £279m restructuring charge had knocked 25 per cent off its pre-tax profits, which were £762m in the six months to 30 June. The charge was to cover a programme of factory closures and more than 1,000 job losses in the UK and Canada. Underlying profits rose 2 per cent to £1.4m.

Michael Smith, a tobacco analyst at JP Morgan, said: "The big surprise was the dividend rise of 10 per cent in a year when earnings are expected to be flat. This shows the group's confidence that markets will return to growth next year."

BAT also reported a return to growth for volumes of its cigarettes, which rose 1 per cent to 383 billion sticks. Last year volumes fell by 4 per cent as the group clamped down on black-market trade. It said sales of its four leading brands ­ Pall Mall, Dunhill, Kent and Lucky Strike ­ had risen by 17 per cent, boosted by a 42 per cent leap in volumes of Pall Mall. The US market remained tough, with group profits from the region down by 42 per cent.

Mr Broughton refused to comment on whether the group was likely to close its factory in Burma, despite pressure from the Government to do so. "We have said we will give them a formal answer and we are not ready to do that yet," he said.