ii view: dividend stock Imperial Brands flags lower vaping losses

New strategic goals and a dividend yield of over 9%. Buy, sell or hold?

First-half trading update to 31March 

ii round-up:

Tobacco company Imperial Brands (LSE:IMB) today reiterated its previous forecast for 2021 profits, with reduced losses for its next generation or vaping products and improved logistics earnings both playing their part.

Full-year adjusted operating profit is expected to improve by a low to mid-single digit amount, aided by a minimum 1% increase in first half adjusted revenues. 

Imperial shares drifted lower by around 1% in UK trading, having gained by more than 10% since pandemic lows this time last year. Shares for rival British American Tobacco (LSE:BATS) are up by around 7% over the same time.

In January, and under a relatively new chief executive, Imperial laid out a series of new five-year strategic goals. These included a heightened focus on its top five tobacco markets which generate 72% of its combustible operating profit. It will also take a more disciplined approach to its e-cigarettes and oral nicotine or next generation products (NGP).

Strong pricing in tobacco, along with some growth in NGP revenues against a weak comparative, both fed into what management described as a “good start” to the year. 

Market share gains in tobacco across the US, the UK and Spain, generated an overall aggregate gain, despite losses in both Germany and Australia. Tobacco volumes remained in line with expectations, although the pandemic had continued to affect consumer buying patterns such as airport purchases. 

Customer insights and validation are now key at the NGP business. Preparations for new market trials in vapour and heated tobacco products are scheduled for later this year. Its vape brands include both blu and Pulze.

First half results are due on 18 May.

ii view:

Employing over 27,000 people, Imperial operates across 120 markets globally. Its cigarette or combustible brands include JPS, West, Winston, Davidoff and Parker & Simpson. Its portfolio of potentially less harmful Next Generation Products (NGP) spans the three categories of vapour, heated tobacco and oral nicotine. As consumer preferences continue to evolve, management expects that by 2025 NGP will account for 20% of the total nicotine market.

For investors, moves by Imperial and its rivals to NGP have been hindered since 2019 by concerns for their exact safety. The use of flavourings to enhance consumer enjoyment, and even possibly encourage new users, also brought the industry under the spotlight. A previous rebasing of the dividend also proved disappointing given the sector’s prior reputation for perceived dividend dependability. 

Under new management, a more focused approach is being taken. Market share gains for its five key tobacco markets are being pursued, while investments for NGP will be more selective. A greater emphasis on consumer data and preferences is underway, with ongoing investments across the company largely funded by efficiency gains and cost savings. A rebased dividend also offers increased financial flexibility and scope to continue lowering group debt. In all, while ethical concerns will continue to deter many investors, a forecast and historic dividend yield of over 9%, even following the rebasing, is likely to remain attractive for many income seekers. 

Positives

• New five-year strategic goals being pursued
• Still attractive dividend payment (not guaranteed)

Negatives

• Growth hopes for NGP previously dashed
• Ethical concerns leave many funds unable to invest

The average rating of stock market analysts:

Buy