Shares of British American Tobacco (BAT) surged 5.82% in London to close at £46.34, significantly outperforming the FTSE 100, which edged down 0.04%. In New York, the company's American Depositary Receipt (ADR) ended the session at $63.64, a gain of 5.3%.
Regulatory Tailwind
The rally was fueled by the U.S. Food and Drug Administration's (FDA) announcement that it will not prioritize enforcement actions against certain unauthorized electronic nicotine delivery systems and oral nicotine pouch products, provided that the manufacturers have filed and received acceptance of their premarket tobacco applications (PMTAs) and meet specific conditions. This shift in policy is seen as a significant advantage for established players like BAT, which have the resources to navigate the regulatory process, over smaller competitors and illegal imports.
Legal Overhang Lifted
Adding to the positive sentiment, a U.S. federal judge dismissed the government's criminal case against BAT related to allegations of selling cigarettes to North Korea. The dismissal followed the company's completion of a three-year deferred prosecution agreement and the payment of a $630 million penalty. This development removed a lingering legal overhang that had been a source of uncertainty for investors.
Smoke-Free Growth Story
BAT has been actively transitioning its portfolio toward smoke-free products. In 2025, these products accounted for 18.2% of total revenue. The company's Velo nicotine pouch brand achieved triple-digit growth, and Velo Plus secured the number two position in the U.S. market by both volume and value share. New Categories revenue grew 7.0% for the full year, with double-digit gains in the second half. The FDA's latest move is particularly relevant for BAT's Vuse e-cigarette and Velo pouch brands, which are central to its long-term growth strategy.
Financial Outlook and Capital Allocation
BAT maintains its medium-term outlook for constant-currency revenue growth of 3% to 5%. The company has also announced a £1.3 billion share buyback program for 2026. Management expects leverage to decline to its target range of 2.0 to 2.5 times by the end of 2026, supporting both dividends and the buyback.
Sector Context and Risks
The positive news for BAT also lifted other tobacco stocks. Philip Morris International rose 2.65%, Altria Group gained 1.87%, and Imperial Brands posted gains in London despite reporting weaker first-half profits and cost pressures. However, the FDA emphasized that products covered by the new enforcement policy remain unauthorized and that inclusion does not guarantee eventual premarket approval. BAT is guiding for 2026 results at the lower end of its medium-term outlook, with global cigarette industry volumes expected to decline by approximately 2% and ongoing currency headwinds.
For now, the market is focusing on the potential for regulatory clarity to drive market share gains for BAT's smoke-free products, while the resolution of the legal case removes a significant risk. The next key catalyst will be the FDA's publication of the list of products covered by the new policy and the actual impact on the market for illegal disposable e-cigarettes.
