You could be forgiven for thinking Neil Woodford is a bit of a curse on investments these days. Over the past few months he’s been reallocating the capital invested in his Woodford Equity Income fund and the Woodford Patient Capital investment trust, moving away from illiquid and unquoted holdings and towards more traditional FTSE 100 stocks.
That’s definitely a good move in my book, especially considering how many of Woodford’s high-risk favourites have fallen on hard times.
He was big on Purplebricks, which overstretched itself and ended up with a share price crash. Eddie Stobart Logistics, another Woodford favourite, is in a slump with trading in its shares suspended, mattress maker Eve Sleep has reported poor business and called off a planned merger, there’s been a write-down at Benevolent AI and, well, it all makes for depressing reading.
And just after Woodford has been buying into Imperial Brands (LSE: IMB), the tobacco giant turned in a disappointing trading update.
Vaping backlash
While the developed world had been increasingly turning way from cigarettes, Imperial Brands has kept its profits ticking along nicely through strengthening of sales of premium brands (with higher margins), and its long-term future looked like it would increasingly benefit from the rising global uptake of vaping.
But with growing health fears surrounding vaping, and especially the crisis in the US hitting the fledgling business hard, Imperial has downgraded its revenue expectations for the year to 30 September. Where the board was previously indicating sales growth of up to 4%, that guidance figure has been halved to around 2%, with earnings per share now expected to be flat.
Price hammered
Investors were noticeably unimpressed, and the Imperial Brands share price took a pummelling, dropping more than 12% at one point on Thursday morning. At the time of writing, the shares have recovered a little, but they’re still down 10%.
Imperial has been, in my view, one of the Footsie’s best long-term dividend prospects for years. Not only has the firm been providing shareholders with big yields, with EPS growing steadily the annual payments have been strongly progressive too. The past four years have seen Imperial’s dividend growing by approximately 10% per year, and with UK inflation running at around 2% that’s a big improvement in real terms. But is that enviable record coming under pressure now? In fact, is its whole business model in danger?
Future solid?
The company said: “Whilst this is disappointing for the current year, we believe that [next generation products] provide a significant opportunity to deliver additive growth to complement our Tobacco business,” and it will be waiting for further developments in the US now. There are increasing calls for sales of vaping products to be halted until a proper health assessment has been done and the Food and Drug Administration gives its approval, so this might just prove to be a short-term hurdle.
Sales of tobacco products are still holding up, “delivering low-single-digit revenue growth and higher tobacco operating profit.“
The price fall has put Imperial Brands shares on a prospective P/E of just 6.8, and the forecast dividend would now yield 11%. That makes Imperial Brands look like a good income buy, but I’d wait and see, with an eye especially on the dividend.