ii view: Imperial Brands increases focus on shareholder returns

Imperial is sitting on a forecast dividend yield of over 6.5% and announcing a new share buyback programme. Buy, sell, or hold? 

Full-year trading update to 30 September

• Trading remained in line with management’s prior forecasts
• Announced a new £1 billion share buyback programme to the end of September 2023

ii round-up:

Imperial Brands (LSE:IMB) is a UK, Bristol headquartered tobacco manufacturer operating in over 150 countries. 

Its cigarette or combustible brands include JPS, West, Winston, Davidoff and Kool. 

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Its portfolio of potentially less harmful Next Generation Products (NGP) spans the three categories of vapour, heated tobacco, and oral nicotine with blu, Pulse and Zone X three of its brands.

For a round-up of this latest trading update on the 6 October, please click here.

ii view:

Separated out of conglomerate Hanson in 1996 and competing against the likes of FTSE 100 rival British American Tobacco (LSE:BATS), Imperial laid out a series of five-year strategic goals in early 2021. These included a heightened focus on its top five tobacco markets generating around 70% of its combustible operating profit,and taking a more disciplined approach to its vaping, or NGP products.

The early period of the plan has concentrated on strengthening the business. Investments in its five priority markets have been made, along with simplifying the organisation and targeting cost-savings. Now, in its second phase, Imperial plans to focus on shareholder returns and generating value for shareholders.

For investors, moves by Imperial and its rivals towards NGP have been hindered since 2019 by safety concerns. 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 more markets remains, while a previous rebasing of the dividend also proved disappointing given the sector’s reputation for perceived dividend dependability. 

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That said, and on the upside, an aggregate market share gain has been achieved across its five priority tobacco markets. Losses for its NGP business are reducing and market share gains made, while it's entering new markets such as Italy . A previously rebased dividend also provides increased financial flexibility, allowing net debt to be lowered. 

On balance, and while ethical issues will continue to deter many investors, a forecast dividend yield of over 6.5% combined with a new £1 billion share buyback programme, now provides a laser like focus on shareholder returns. 

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