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A more positive outlook for Imperial Brands shares ahead


The tobacco business has continued to perform well despite an uncertain and disrupted trading environment, says Imperial Brands (LSE:IMB) in its recent trading statement. The tobacco giant has forecast a drop in earnings per share of 6%, after making increased provisions for Covid costs and uncertainties. The share price stands at 1,300 (as at 23/10/20, which is 29.87% down year-to-date), with a dividend yield of 14.58% and an EPS of 0.9.

Imperial Brands said it expected full-year net revenue to be broadly flat, as an unexpected 1% increase in its tobacco business offset a 30% drop in its new Next Generation Products business (which includes its vaping products).

We see this as a creditable performance, considering the significant headwinds the company was facing even before Covid. GlobalData research shows that in the UK, cigarettes sales are expected to fall 15%, with a 13% drop in value in 2019-2020 compared to pre-Covid projections.

GlobalData estimates that the tobacco industry has lost $1.9bn in revenues as a result of anti-smoking measures introduced by governments to promote health, while the obvious concerns over respiratory health during the Covid crisis, coupled with consumers’ tightened budgets, lockdown-related closures and social distancing have all affected the consumption of tobacco products.

Imperial Brands forced to scale back Next Generation business

Imperial Brands’ debt pile has forced the sale of its premium cigar business for just over £1.12bn. Imperial Brands has also had to scale back investment in its New Generation Products business, after the business failed to meet expectations as the next frontier for the tobacco industry.

Imperial Brands’ customers have shown their brand loyalty throughout the Covid crisis, and can be expected to continue driving the company’s revenue growth and generating cash for dividends into the new year and beyond. Whether the FTSE 100 stalwart can maintain its profitability and cash flow for dividends over the long term, in the face of mounting regulatory pressure and the increasingly widespread use of ethical fund screening, remains to be seen.

Stefan Bomhard: new perspectives on Big Tobacco

Another unknown is the new chief executive Stefan Bomhard, who has already made a number of senior hires to bring in new ‘perspectives’. He is also conducting a strategic review of the business, with the aim of making some initial observations when the preliminary results are published on 17 November.

The Imperial Brands share price, like much of the London stock market, has declined steadily since the Brexit vote in 2016, as investors shunned UK stocks. But with all such negative factors baked into the share price, we like to think that Imperial Brands stock could benefit when the UK/EU negotiations are finally concluded in the coming months, lifting a significant source of uncertainty from investors’ minds.

With the matter finally resolved, deal or no deal, investors may take another look at UK stocks, recognising them as among the most underpriced anywhere: Imperial Brands’ share priced has slipped from £35 five years ago to £13 today.

We would also note Imperial’s wide economic moat, which means it is a dominant player in its sector. And it has one of the highest dividends in the FTSE 100, with plans to return excess cash to shareholders via share buybacks. To sum up, Imperial Brands is a well-run business that rewards its investors, and heading into calmer waters next year.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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