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Imperial Brands Group reported its results last week and for once a company could not really blame Brexit for its woes. Imperial Brands is facing something a little more long term and systemic.

In its interim results for the six month period ending 31 March, Imperial Brands said tobacco sales were down 6.9% to 115.2 billion stick equivalents. Net revenue increased 3.8% on a reported basis and 2.5% on a constant currency basis.

Imperial Brands shares currently trade at 7.7x consensus September 2020 earnings with a prospective dividend yield of 9.2%.

The company has said that it expects full year sales, cash generating and earnings to remain largely unchanged, and some analysts have expressed surprise at how resilient Imperial Brands and other tobacco producers have been. But the shares are down.

Imperial Brands Group: time to sell their stock?

Imperial Brands shares were priced at 2111.73 at the time of writing, and have been on a slump that really began at the beginning of April. We would argue that despite the results, there are some major headwinds that Imperial Brands Group needs to cope with.

Firstly, as noted by several tobacco sector analysts, global regulation and curbs on the sale and smoking of tobacco is just getting tighter. And it’s not just tobacco, but other products that contain nicotine. While the focus has been on North America recently, we would expect more and more countries to bring in further restrictions.

One response by the tobacco industry has been to raise prices further, but cigarettes are already relatively expensive and we can expect governments to continue to slap yet more duty on them as the number of committed smokers continues to decline.

Seasoned institutional investors in tobacco stocks like Imperial Brands Group have also regarded emerging markets as a profitable frontier for cigarette sales, but even here consumers are waking up to the dangers of the product, and it is not surprise that Imperial Brands is seeing sales in regions like Asia and Africa starting to slow down.

And while we are on institutional investors, more and more funds are dropping tobacco stocks from their portfolios as they come under pressure from stakeholders. This has moved from the eccentric fringes of asset management 15 years ago to become a mainstream issue. Fewer pension funds will want to see tobacco stocks in their portfolios.

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Stuart Fieldhouse

Stuart Fieldhouse has spent over 20 years in journalism and financial communications, including six years as a wealth management correspondent for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong.

Stuart has worked as head of content at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Stuart continues to work with hedge funds, private banks, stock exchanges and other financial institutions on their communications, data and marketing requirements.

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