Imperial Brands shares surge to highest since start of 2020

This attractive dividend stock yielding over 7% has done enough today to extend already impressive gains in 2022. Our head of markets talks us through its latest update.

In deteriorating markets investors have sought the refuge of solid defensive options and the tobacco sector has been one which is back in investment favour.

Ethical considerations aside – which prevent some institutions from being willing or able to invest in the sector – the cash generation within the sector remains huge, given the inelastic demand for products, and investors have been tempted to reassess prospects in light of wider market malaise.

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Having reduced net debt and further strengthened its balance sheet to its own acceptable levels, Imperial Brands (LSE:IMB) has accelerated shareholder returns. In an update for the full year to 30 September 2022, it announced a share buyback programme to the tune of £1 billion, which should lend further support to the share price and the key metrics such as earnings per share in particular. In addition, a dividend yield which currently stands at a punchy 7.4% is an attraction to income-seeking investors in its own right.

The group has been investing in and concentrating on its five core markets of the US, UK, Germany, Spain and Australia, which combined account for 70% of operating profit. There has been an improvement in aggregate market share across these countries, with the recovery of international travel resulting in a return to the purchasing patterns (such as duty free) of pre-pandemic times.

Longer term, and a cloud which has hung over the sector in less popular times, is the requirement ultimately to replace the combustible offering. For Imperial, solid cash generation elsewhere has enabled substantial investment in Next Generation Products, such as heated tobacco and vapour devices.

While this part of the business remains unprofitable at present, the scale of losses are beginning to dwindle as the group sharpens its offerings to those regions in which it sees maximum potential. It has, for example, now launched in Italy, which is Europe’s largest heated tobacco market, while there have also been further share gains in the likes of Greece and the Czech Republic.

In terms of outlook, the group is maintaining expectations for full-year trading to be in line. Net revenues and adjusted operating profit are both expected to benefit by 1% due to currency tailwinds, while overall capital expenditure to drive future growth will be between £300 million and £350 million per annum.

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The company is well on track on a five-year plan which now moves into the growth phase, with the strengthening phase complete. In the meantime, the adjustments to the overall financial strength of the group are already washing through in terms of increased profit and shareholder returns.

The share price has reacted positively to the company’s return to favour, having risen by 22% over the last year, as compared to a marginal gain of 0.8% for the wider FTSE100. Alongside a generous dividend yield, the total return has been significant and with the current outlook providing the possibility of more of the same, the market consensus of the shares as a "strong buy" reflects such prospects.