Imperial Brands: A top FTSE 100 dividend play

It's outperformed the wider market since early January, and a big dividend compensates for the risk.

As last year's worst performing sector on the London market, income investors will be relieved to see tobacco giants Imperial Brands (LSE:IMB) and British American Tobacco (LSE:BATS) making a better fist of it in 2019.

Today's half-year update from Imperial - owner of the Davidoff, JPS and Blu brands - underlines this optimism, with the Bristol-based company appearing well placed to continue its proud record of growing its total dividend by 10% every year for the past decade.

At 8%, Imperial's forecast dividend yield ranks alongside rival BAT as among the best in the FTSE 100 index. It's supported by strong cash flows, with last November's 187.8p a share award representing a pay-out ratio of 67% of earnings.

The conversion of adjusted profit into cash flows was robust last year at 97%, which Imperial has been using to pay down an £11 billion debt pile, as well as to invest in its tobacco growth brands and support next generation products as more smokers convert to vaping.

Source: TradingView (*) Past performance is not a guide to future performance

Pressure from US regulators, however, weighed on shares across the tobacco sector in 2018, with Imperial slightly more resilient than BAT despite a hefty fall of 22% over the year.

One reason for this performance is that Imperial is less exposed than Reynolds owner BAT to the US, where the Food and Drug Administration (FDA) has considered a number of curbs, including a ban on menthol cigarettes and restriction on the sale of e-cigarettes to teenagers.

Imperial's Blu vaping brand is widely available outside the United States, with markets in the UK, France, Germany, Japan, Italy and Russia also selling the product. Sales of next generation products grew sharply to £200 million in Imperial's November annual results, but this still represented only 2.5% of total revenues. 

Source: TradingView (*) Past performance is not a guide to future performance

In today's trading update, Imperial said Blu was building strong retail share positions in Europe and Japan, with good year-on-year growth in the United States despite the FDA uncertainty.

Tobacco volume trends in the six months to March 31 are slightly behind the prior six months, but this is offset by continued strength in pricing and a favourable product mix.

Overall, full-year net revenues are on track to grow at the upper end of the company's 1% to 4% range, with earnings per share growth within its 4% to 8% guidance range.

Revised FX guidance caused shares to fall 1% to 2,544p today, although Imperial is still 7% higher across 2019 so far. Analysts at UBS have a 'neutral' recommendation on the shares, with a price target of 2,400p.

*Horizontal lines on charts represent levels of previous technical support and resistance.