Dividend stock Imperial Brands shrugs off costly Russia exit

Shareholders have been rewarded in 2022 with a booming share price and dividend yield of almost 7%, and despite the cost of exiting Russia, these annual results have been well received. Our head of markets explains why.   

Ethical considerations aside, Imperial Brands (LSE:IMB) continues to tick any number of investment boxes and shareholders have been handsomely rewarded as a result.

At the same time, a difficult economic backdrop has seen some investors reassessing their options, and defensive shares have seen the benefit as more weatherproof companies are sought. Imperial Brands is a typical example, with products which enable price increases to be passed on despite decreasing volumes, an extraordinary amount of cash generation and all with an eye on likely future developments.

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Growth in “Next Generation Products” is a case in point. The NGP unit comprises products such as heated tobacco and vapour devices, and increased investment in new regions as well as a more varied suite of options is already beginning to gain traction. The area is likely to be one of key importance in the years to come, which has been recognised by the industry, with the race to the top in full flow.

For Imperial, there are promising signs in the NGP area. Annual net revenues have increased by 11%, driven by expansion of products and geographies. For the moment, the unit remains loss-making, although the general direction of travel is becoming more established. In this period for the year ended 30 September, losses were reduced by 39% to £87 million which, in the context of the group overall is a minimal impact.

At the group level, adjusted operating profit of £3.7 billion is an improvement from £3.6 billion the year previous, and above expectations of £3.4 billion. Pre-tax profit reduced by 20%, mainly due to the costs of the group’s withdrawal from Russia and the previous boost from the sale of the Premium Cigar Division.

Meanwhile, the overall price mix increased by 6% for the year. A particularly strong second half of the year enabled price increases of 10.7% to offset volume declines of 4.7% and added to the strength of the numbers.

Indeed, such cash generation allowed more progress on the group’s financial position. Net debt was reduced from £8.6 billion to £8.05 billion, hitting 2x earnings, at the lowest end of the company’s target. The previously announced £1 share buyback programme is ongoing and a further increase to the dividend is an additional reward for shareholders, where the projected yield of 6.9% remains a tempting attraction.

Imperial is also seeing benefit from concentrating on those regions of promise. Apart from Russia, the company has also exited Japan. Meanwhile, there was market share growth in the US, UK, Australia and Spain. In Eastern Europe, net revenues increased by 6.6%, leading to a hike of 4% in operating profit.

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Of course, the move to reliance on NGPs will become more critical as time progresses, but for the moment the transformation plan is bearing fruit. Imperial is two years in to a five-year plan, and has been strengthening and focusing the business which should leave the path clear for improved growth over the remainder of the plan.

The share price has also added to shareholder returns, having risen by 30% over the last year, as compared to a marginal gain of 0.4% for the wider FTSE100. The nature of the industry may not be to everyone’s taste, but from an investment perspective the company’s performance is hard to dispute, with the market consensus of the shares as a 'strong buy' underlining the potential for further rewards.