British American Tobacco expects vaping and tobacco heating devices to contribute to profit growth for the first time this year as demand for reduced-risk products accelerates.

The London-listed group on Wednesday said revenues from its “new categories” business, including the Vuse, Velo and Glo brands, rose 15 per cent in the year ending December, to £1.5bn.

It is still a small share of overall revenues — which last year reached £25.7bn, growing just over 3 per cent on an adjusted basis — but declining cigarette sales in wealthier countries have spurred the development of alternative tobacco products, as consumer focus on health grows.

Jack Bowles, chief executive, told the Financial Times that investors want to see good financial delivery, dividends and “an acceleration in the transformation of our business”.

BAT, whose brands include Lucky Strike, Newport and Natural American Spirit, said it had invested nearly half a billion pounds in the so-called reduced risk category last year. It expects sales of £5bn by 2025 and 50m customers for its new products by 2030, compared with 13.5m today and the 150m people who smoke its cigarettes.

“And the market for cigarettes is going down by an average of 3 per cent a year, so you do the maths,” Bowles added.

BAT’s decision to step up focus on next generation products comes as its UK-based rival Imperial Brands has said it will pivot back to cigarettes, arguing it became “overly focused” on vaping devices and other alternative nicotine products.

Kingsley Wheaton, chief marketing officer, on Wednesday told reporters that losses at BAT’s new categories business would fall over the next year, with growing sales at the division contributing to full-year profit growth.

Pre-tax profit at BAT grew nearly 9 per cent to £8.7bn in the year to the end of December, helped in part by lower costs related to lawsuits. The group plans to raise its dividend by 2.5 per cent to 215.6p.

Investors were, however, disappointed by the company’s 2021 guidance of mid-single figure adjusted earnings per share growth, pushing its stock price down more than 4 per cent in morning trade in London.

“There’s some degree of erring on the side of caution, which is why the shares are off,” said Alicia Forry, analyst at Investec.

Close to half of BAT’s revenues come from the US, where cigarette sales having been falling for years but unexpectedly edged up during the pandemic, buoyed by lower fuel prices and fiscal stimulus.

The boost helped the company offset lost duty free sales at airports and other travel hubs. But analysts said it looked exposed as they expect the resilience of cigarette sales in the US to soften when government stimulus tapers off.

“The US had a very strong year last year [in terms of cigarette sales] so it is a bit unclear to what degree that may reverse,” Forry said.

She added that BAT has been “quite opportunistic” in the US “moving quickly to take share” following the spectacular collapse of former market leader Juul, the vaping company that rival Altria has invested in.