I found it interesting that the comment that was written to my article about the challenges of high headline dividend yields asked about my views on Imperial Brands (IMB). I took the view that for the tobacco giant it actually was more of an opportunity than a threat because I could not see the scope for the dividend to be cut because of what I perceive as the strengths of its cash flows. And actually this is how it seems to be working out...
A regulatory news disclosure entitled 'Capital Allocation & Shareholder Distributions' does sound boring, but the gist is that the days of the company's much lauded 10% per annum dividend growth is over after this year, and the new policy is going to be 'revised progressive dividend growth policy thereafter'. This is better than many of the case studies suggested by the graphic I also presented at the link above where big headline anticipated yields are often a precursor to an effective and practical cut. As I noted above, I thought that Imperial Brands is and will be cut from a different cloth. It certainly seems to agree with its observation of 'the importance of growing dividends for shareholders, while providing greater flexibility in capital allocation'.
This latter notion is also reflected in the company's announcement of a new £200 million share buyback which is a helpful further source of shareholder returns, albeit equivalent to around 1% of the current market cap. But it is also reflected in the need to 'further deleverage to support a strong and efficient balance sheet' in today's world to a net debt to ebitda ratio below x2. What really kills an actual dividend payment rather than an anticipated one is always high debt levels. At least Imperial Brands has the capability to progress a middle ground where those excitable 10% per annum dividend increases are no longer sustainable...but at least the stock has not become another statistic for the actual dividend yield graphic...yet. I guess that is demerit 'sin' goods for you...
So where do we go from here? I am hoping a share price recovery to a double-digit EV/ebit multiple which is consistent with a mid £20s share price by the end of the year as investors consider the company's latest tobacco market trends as cigarettes are supplanted by other, newer options. That will still mean an 8% yield and hence further share price potential if a reasonably solid business operational story can continue. Time to review this second stage at a later results date. However, shorter-term, the reaction to the above news has correctly been positive and I believe this improvement in sentiment continues. Still a BUY today for me, even if I would not personally touch any of the sector's products.
Filed under: Imperial Brands, Woodford, AVZ Minerals, Boatman Capital, Redx, Wetherspoon
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