Imperial Brands: A five-year low and 9.3% dividend yield

Imperial has maintained guidance for profit growth, but the City is clearly not buying the vaping boom.

Any jitters among income investors over the big dividend at Imperial Brands (LSE:IMB) surely won't have been helped by today's significant share price reaction to half-year results.

At just over 2,200p, the FTSE 100 stock is now trading at its lowest level since 2014 after losing 5% of its value in the wake of today's results and falling 15% in the space of the past month.

The share price slump leaves Imperial's forward yield at a chunky 9.3%, ranking the Bristol-based group alongside rival British American Tobacco (LSE:BATS) among the highest in the top flight.

The question for investors is whether Imperial and its proud record of growing its dividend by 10% every year for the past decade represent a recovery play worthy of the risk. Valued at 8.2 times 2019 earnings, the shares are currently trading at a 59% discount to European staples.

That reflects the tobacco sector's bottom-of-the-pile performance in 2018 and the City's apparent ongoing scepticism over the ability of Imperial and BATS to convert enough smokers to next generation products such as e-cigarettes.

Source: TradingView   Past performance is not a guide to future performance

This uncertainty is not helped by a tightening regulatory picture as the US Food and Drug Administration plots new restrictions on menthol and nicotine levels in cigarettes, as well as measures to prevent youth access to vaping and tobacco products.

While British American Tobacco is much more exposed to the American market due to its acquisition of Reynolds, Imperial Brands admitted today that an otherwise strong performance for its Blu vaping brand had been tempered by a slowdown in the US.

This meant a 245% jump in revenues from next generation products to £148 million came in short of the City consensus at £176 million. Blu is still a small part of the business, with wider group net revenues up 2.5% to £3.65 billion in the six months to March 31 despite underlying tobacco volumes declining 4.5% in line with the rest of the industry.

It is estimated that global sales of vapour products are currently worth around £8 billion a year, but research has suggested this could jump to £30 billion by 2020. If Imperial's own management incentives are anything to go by, the company could be delivering next generation revenues in 2020 of up to £1.5 billion.

To support this growth, Imperial has invested an additional £94 million on driving increased brand awareness and on smoker trials across all its markets. Markets in Europe and in Japan appear to be responding well, but that's been offset by the US regulatory pressure.

Today's developments haven't changed the company's guidance for the year as a whole, with constant currency revenue growth at, or above, the upper end of its 1-4% range. The medium-term guidance for constant currency earnings per share (EPS) growth remains in place.