GUIDELINES 1981 : nOLICATIONS FOR B.A.T MUSTRIES
The purpose of this paper is to summarise the Group Objectives and
Investment Strategies agreed by the Board at the meeting on 29th September
1981 and to show the implications for B.A.T Industries of the Operating
Groups achieving dividends and debt:equity ratios in accordance with the
Guidelines.
1. Growth Objectives: The Group's overall financial objective is to
increase attributable profits and dividends by at least 3% p.a. in
real terms -
In addition, there should be a minimum dividend cover of 1.5 on CCA
attributable earnings less 'unavailable retained earnings'.
2. Dividends: The table shows the implications for B.A.T Industries
of the Operating Groups declaring dividends in accordance with the
Guidelines.
Dividend
Declarations Em 1982 1983 1984 1985 1986
B.A.T. Co. 75 75 80 90 100
BATUS (at US $1.82 rate) 62 67 80 86 96
Intarversa (at DM4.4Z rate) 13 14 17 17 19
Wiggins Teape 4 10 20 25 30
MPI 7 7 8 9 10
B.A.T Stores 6 8 10 10 10
B.A.C. 4 4 5 6 7
Amatil (at A$2 - 03 rate) 2 3 3 3 4
Imasco (at C$2-86 rate) 5 6 7 8 8
TOTAL 178 194 230 254 284
B.A.T Industries' Requirement 158 180 200 224 250
Surplus 20 14 30 30 34
The dividends shown for 3ATUS, Interversa, Amatil and Imasco are not
receipts, after allowing for withholding taxes.
It should be understood that all Guidelines agreed for Operating N.,
Groups should be minimum and, in particular, it is expected that,
where earnings growth increases, there should be a comparable
increase in dividends to B.A.T Industries. co
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3. Risk Prof ile: The Group should achieve and maintain a reasonable
'risk profile', particularly as measured by the industrial and
geographical distribution of earnings and assets and by, the
debt:equity ratio (where the policy is to limit this to a maximum
of 50% overall and 60% in transferrable currency areas). However,
no really valuable and justifiable investment opportunity sbould be
lost as a result of an inflexible constraint on resources. In
exceptional circumstances, the debt:equity ratio could be allowed
to rise above the Limit stated provided there is assurance that the
proportion of debt to equity will return to a ratio inside the
limit within 3 years.
4. Debt:Equity : The year end debt:equity requirements included in
the Guidelines to the Operating Groups are su=arised below.
Ratio Z 1982 1983 1984 1985 1986
B.A.T. Co. 11 10 8 7 7
BATUS (UK Basis) 60 59 56 56 56
Interversa so 50 50 50 50
Wiggins Teape 90 80 70 65 65
MPI 60 60 60 60 60
B.A.T Stores 25 25 25 25 25
B.A.C. 50 50 50 50 50
If the Operating Groups stay within their Guidelines, the resulting
debt:equity ratio for B.A.T Industries will be at or below 4OZ.
The sensitivity to variations from these Guideline figures is
indicated in the following table, which shows the approximate
change in percentage points in each Operating Group ratio which
would result in a change of one percentage point in the ratio for
the Group as a whole.
B.A.T. Co. 3
BATUS (UK Basis) 4
Inter-versa 7
Wiggins Teape 15
NPI 15
B.A.T Stores 20
B.A.C. 35
it should be noted that the debt:equity requirements for B.A.T
Stores and the resulting debt:equity ratios for B.A.T Industries
exclude the effects of the UOu payment for Mac Markets, 4US in
1983. If this La funded by borrowings, the B.A.T Industries
debt:equity ratio will be increased by about 2 percentage points,
equivalent to 40 percentage points for B.A.T Stores Holdings.
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5. Performance Objectives: The Group Objective is that the return on
assets should be a minimum of 25% in historic accounting terms. (At
an iuf lation rate of 10%, this equates to a CCA return of
approximately 15%).
The targets agreed for the Operating Groups clearly must reflect the
situation in which they find themselves but it will become
increasingly important to ensure that. where they are making nev
investments, these can be reasonably expected to meet the Group's
objective for returns on assets.
The return targets for the medium term included in the Guidelines to
Operating Groups are as follows :-
Return on Assets
CCA Historic
B.A.T. Co. 15 28
BA67US 14 25
Interversa 15 20
WT 11 24
MPI 10 20
B.A.T Stores 10 20
B.A.C. 15 '26
6. ACT: The ACT issue is one of considerable concern and highlights yet
again the importance of UK perform=e. Bowever, radical ways of
reducing the impact should also be considered or re-considered.
7. Growth Opportunities: Operating Groups should be asked in their
Plans to assess the real growth opportunities available to them in
the medium and longer term, with a realistic evaluation of the
investment required and returns to be achieved. The consequences of
these assessments should then be reviewed by BAT Industries in the
light of its growth and other objectives.
8. Leadership: Each business within the Group should be established in
a leadership position in its chosen market through having a defined
competitive advantage. This could occur in a number of ways (e.g.
through a superior product, through lower production costs, through
market position, ate.) and it is left to each business to define
their competitive advantages. This objective in believed to be
particularly important since it is on the competitive strengths of
its component businesses that the ability of the Group to achieve its
financial objectives ultimately depends.
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9. Investment Strategies agreed by the Board were as follows:-
(a) The first priority in investment should be the maintenance and,
where possible, the improvement of the competitive position of the
Group's Tobacco businesses.
(b) However, it is still the Group's long term aim to reduce its
dependence on Tobacco by achieving a rate of growth in non-Tobacco
profits such that by 1990 these are contributing at least 502 of
total Group profits.
C0 Non-Tobacco investments should ceutre on activities which ca a be
undertaken within the framework of existing businesses.
(d) Additional opportunities should be sought to build on existing
Group strengths. Opportunities for improving the use of existing
assets (e.g. property) should also be given spacial consideration.
(e) Emphasis should continue to be placed on the need for each element
of the business to be capable of achieving self sufficiency in
funding and there should be a continuing requirement for a rigorous
attitude to be taken to activities with low performance which
cannot be improved within an acceptable time scale.
(f) Particular emphasis should be given to improving the results for UK
based businesses without increasing the proportion of Group assets
employed in these businesses.
(g) Further consideration should be given to ways of accelerating
profits growth in BATUS by investment within the limits of their
debt:equity guideline and without dilution of B.A.T Industries'
shareholding.
(h) Elsewhere, particular emphasis should be given to accelerating the
rate of development of non-Tobacco activities in selected countries
overseas, particularly in SE Asia and Latin America. Priority
should be given to countries where the Croup has an existing
business and where funds are available, but the possibility of
additional net investment should not be ruled out.
(i) Preference should be given to maintaining or establishing
successful businesses rather than merely selling technology.
Although majority shareholdings are preferred, it is accepted that
minority positions, with a sufficient degree of management control,
may be the optimum achievable in certain countries.
RS/PS
28th October, 1981
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