Imperial Brands - an income buy

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Shares in tobacco and ‘next generation’ products smoking-focused Imperial Brands (IMB) were above 2000p early this year and it updated recently including “although the economic and social impact of COVID-19 is developing rapidly, there has been no material impact on group performance to date and current trading remains in-line with expectations”. The shares are though now available to buy at 1595p - they were 1570.5p when this article first appeared - and we think you should although we regard a dividend cut as almost inevitable. As to be expected with the company in the FTSE-100 index, it has strong brand positions in a multitude of international markets – it notes “we have strong brand positions in cigarettes, fine cut tobacco, papers and cigars. Our NGP focus has been primarily on our blu vapour brand but has expanded… to include other nicotine assets in heated tobacco and oral nicotine”. The latter two include, respectively, the Pulze and Skruf brands and the company’s other brands include JPS, West, Winston, Davidoff and Parker & Simpson.

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In February it was announced that CEO Alison Cooper (last year remuneration £2.137 million, including £1.104 million salary) had stepped down and that Stefan Bomhard would join the company as CEO. He joins from FTSE-250 ‘distribution and retail leader in the premium and luxury automotive sectors’ Inchcape (INCH) with effect from 1^st July – the experience from another tough, consumer-focused sector should help him here. In the meantime it was stated “Dominic Brisby currently Divisional Director, Americas, Africa, Asia and Australasia, and Joerg Biebernick, Divisional Director, Europe, will assume the roles of Joint Interim Chief Executive Officers, reporting directly to Thérèse Esperdy, Non-Executive Chair”. Esperdy has significant international investment banking experience, particularly having held a number of roles at JP Morgan. The company updated in early February including noting “the US FDA's ban on certain flavours of cartridge-based vapour devices and weaker than expected consumer demand for vapour”.

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The latest “in-line with expectations” is stated with “our operations benefit from a diversified supply chain and factory footprint, which is prioritising the manufacture of major product lines to build contingency stocks. Our distribution business, Logista, which serves Italy, France and Spain has increased the levels of finished goods stock in its regional distribution hubs and continues to deliver product to retailers”. Additionally, a c. £3 billion revolving credit facility has just been replaced with a new €3.5 billion (£3.1 billion) such facility with a syndicate of 20 banks. The company adds “it provides the business with committed bank financing until March 2023… is currently undrawn and underpins the liquidity position of the business. Our outstanding bonds have a staggered maturity profile out to 2032 with limited maturities falling due in any one year”. At the 30^th September 2019 year-end underlying net debt was £11.4 billion, with £11.1 billion of current assets and £28.1 billion of total liabilities.

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The nature of the business means clear regulatory risk and there are demand pressures in the near-term as noted above and in the longer-term from economic development trends. The company though argues there growth opportunity in its ‘next generation’ products. There is also the noted balance sheet and thus risk to the dividend. However, the February update included “we now expect constant currency full year group net revenue to be at a similar level to last year and adjusted earnings per share to be slightly lower than last year” – for its year ended 30^th September 2019 they respectively £7.9 billion and 273.3p. There have been no recent pronouncements on dividends – 206.57p per share paid for last year. Indeed, the final dividend was only paid on 31^st March – the same date as the “New Revolving Credit Facility/Trading Update”. The level of the payout in relation to the noted earnings and balance sheet suggests a dividend cut prudent and, with the current trading backdrop and the new CEO coming in, there looks the perfect ‘excuse’ to do so – a material cut would also enable credible argument of a progressive dividend policy from there.

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On last year’s payout, the current share price equates to a dividend yield of 13%. That suggests the market sees it as unsustainable – and indeed may well provide share price reward for a cut which suggests prudence and looks to offer a more sustainable future outlook. Even a halving would still likely mean much more than most of the rest of the market – with there multiple dividend cancellations, let alone cuts, elsewhere. It would also still see a £20 share price equate to a dividend yield of more than 5% and likely a still relatively modest PE ratio. As such, targeting a return towards 2000p, Imperial is an Income buy.

This article first appeared on the N50 website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website for a new share tip from Tom & Steve and a new shorting piece both THIS AFTERNOON click HERE

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