These three blue-chips issued profits warnings at same time

by Graeme Evans from interactive investor |

A 10% yield is on offer at one of these laggards, while the other two just got significantly cheaper.

Warnings from International Consolidated Airlines Group (LSE:IAG), Pearson (LSE:PSON) and Imperial Brands (LSE:IMB) provided investors with a stark reminder today about the challenges of sticking with the FTSE 100 old guard.

Such stocks are invariably great sources of income, but as Pearson and Imperial showed this morning they are also under huge pressure to reinvent themselves for a modern era.

Progress at both companies is now known to have stuttered in recent months, with Bristol-based Imperial blaming regulatory uncertainty in the United States for hampering its drive towards e-cigarettes and other next generation products.

The transition at Pearson from print to digital textbooks is also under fresh scrutiny, despite  impressing investors during 2018 when its shares were among the best-performing on the FTSE 100. Even when Pearson shares were racing ahead last year, analysts highlighted concerns that the improvement was dependent on cost savings rather than top-line growth.

These fears resurfaced today when the company revealed that its US Higher Education Courseware business had performed below expectations during its key selling season, pushing overall group profits to the bottom of the City's forecast range.

While Pearson insists it is still in much better shape than it was three years ago, investors were not convinced as shares tumbled 19% to below 700p for the first time since early 2018.

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

Analysts at Morgan Stanley said the warning appeared to contradict recent management optimism that a "corner is about to be turned" in the company's transition. The scepticism was shared by investors today, with little evidence of any appetite to buy back cheaper shares.

A similar reluctance was seen with Imperial, where shares were stuck 10% lower at 1,849p - the lowest level since 2011 - amid growing fears that its record as one of the London market's most attractive dividend payers is under threat.

A forward dividend yield of 10% highlights those concerns, particularly as the company recently said it would replace its decade-long 10% annual dividend growth policy with progressive pay-outs.

Imperial now expects earnings per share to be flat this year, compared with the consensus for 4.4% growth. This also reflects tougher conditions in Africa, Asia and Australasia, with group revenues now likely to grow by 2% rather than the 3.8% seen in the City.

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

While its next generation business should still grow revenues by 50% this year, that's below the company's expectations after a marked slowdown in the US vaping category. It comes amid regulatory uncertainty as the Trump administration prepares an industry ban on flavoured e-cigarettes due to concerns they encourage under-age vaping use.

Morgan Stanley said the update reinforced its concerns about the strength of Imperial's next generation portfolio, particularly after recent Nielsen data showed it losing market share to British American Tobacco (LSE:BATS). Imperial's UK-listed rival reiterated its guidance on next generation products and group revenues as recently as September 12.

Out of the three profit warnings today, the share price performance of British Airways owner International Airlines Group was the most robust. Its shares were down by 4% to 462p after it downgraded its guidance in the wake of disruption caused by recent pilot strikes.

While its new forecast for operating profits to be about 215 million euros lower than last year's 3.5 billion euros was broadly in line with existing City estimates, there was concern about the inclusion of a warning on booking trends at its low-cost Vueling ad LEVEL operations.

With no further talks planned between British Airways and the BALPA union, there remains the risk that this year's performance could be blighted by further industrial action.

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

While shares have fallen by 23% this year, UBS analyst Jarrod Castle has a ‘buy’ recommendation and a price target of 705p. The stock trades with a 6% dividend yield.

IAG is one of a number of household names to have struggled in the FTSE 100 index this year. The list includes BT Group (LSE:BT.A), The Royal Bank of Scotland Group (LSE:RBS) and Centrica (LSE:CNA), while Marks & Spencer (LSE:MKS) lost its place in the top flight on Monday after the latest quarterly reshuffle.

 These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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