ii view: high-yielding Imperial Brands halves e-cigarette losses

Building on its five-year strategic plan and offering a dividend yield of over 8%. We assess prospects. 

Full-year results to 30 September

• Revenue up 0.7% to £32.8 billion
• Adjusted organic profit up 2.7% to £3.57 billion
• Net debt down 16% to £9.37 billion
• Total dividend over the year up 1% to 139.08p per share

Chief executive Stefan Bomhard said: 

"This has been a year of important progress and significant change, as we begin to deliver on the new, focused strategy we announced in January 2021. We have simplified the organisation, creating efficiencies for reinvestment. 

"Through our focused, consumer-led next generation products strategy, we are committed to making a meaningful contribution to harm reduction over time by offering adult smokers potentially reduced risk products

"Our five-year plan to transform Imperial is divided into two distinct periods. The year ahead will complete the two-year strengthening phase, with further investment in our five priority markets and NGP pilots, the embedding of new ways of working and cost-saving initiatives. This period builds the foundations for the subsequent three-year phase, which focuses on the acceleration of returns and sustainable growth in shareholder value."

ii round-up:

Tobacco company Imperial Brands (LSE:IMB) today reported full-year results in line with its recent trading update as it more than halved losses from its e-cigarette, or next generation products (NGP) division.

Total revenue rose by 0.7% to £32.8 billion as NGP losses fell 57% to £138 million and overall adjusted operating profit climbed 2.7% to £3.57 billion. 

Imperial shares retreated marginally in UK trading, having gained by close to a fifth since pandemic induced market lows in March 2020. Shares for rival British American Tobacco (LSE:BATS) are up by just under 10%, while the broader FTSE 100 index has gained around 47%. 

Imperial raised the total dividend by 1% to 139.08p per share from 137.71p in 2020. Prior to 2020 it cut or rebased the payment to two-thirds of its former figure. 

Adjusted net debt fell by £1.7 billion given strong free cash flow of £1.5 billion, the previously reduced dividend payment and proceeds from the sale of its Premium Cigar Division. 

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 just over two-thirds of its combustible operating profit and taking a more disciplined approach to its vaping or NGP products.

Looking ahead, management expects net revenue to grow at a similar rate to 2021, with adjusted operating profit forecast to grow at a slightly slower pace than net revenue due to its planned step up in investment under the five-year plan.  

ii view:

Separated out of conglomerate Hanson back in 1996, Imperial is today a Bristol headquartered tobacco manufacturer operating in over 120 global markets. Its cigarette, or combustible brands include JPS, West, Winston, Davidoff and Kool. 

Its portfolio of potentially less harmful Next Generation Products (NGP) spans the three categories of vapour, heated tobacco, and oral nicotine with both blu, Pulse and Skruf its three respective brands. 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 towards NGP have been hindered since 2019 by concerns over their safety. The use of flavourings to enhance consumer enjoyment, and even possibly encourage new users, also put the industry under the spotlight. The potential for plain packaging in Europe should be remembered while a previous rebasing of the dividend also proved disappointing given the sector’s prior reputation for perceived dividend dependability. 

Now under new management, market share gains in three of its five priority tobacco markets have been achieved, while losses for the NGP business reduced and investments began. 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 8%, even following the rebasing, is likely to remain attractive for many income seekers. 

Positives

• Five-year strategic plan being pursued
• 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