The share price of Imperial Brands (LSE:IMB) shot up by 8% yesterday after the company released its latest earnings report. This momentum has lifted the 12-month performance of the stock to just over 16%. And as a result, shares are almost back in line with pre-pandemic levels. So, is now the time to buy? Or is the recent excitement short-lived?
The rising Imperial Brands share price
Looking at the latest report may leave some investors scratching their heads. Why? Because the reported figures weren’t actually that great. Revenue fell by 1.3% year-on-year, while earnings per share plummeted by 45%! The adjusted figures do look more encouraging. However, they seemingly didn’t merit the jump in share price when Imperial Brands released these earnings. So, what’s going on?
The company is now 18 months into its five-year growth strategy. So far, the group has managed to expand its market share by a further 0.25%, courtesy of a 1.05% increased capture in the UK. However, what seems to have investors excited is the progress being made with its Next Generation Products (NGPs) like heated tobacco and vaping devices.
NGPs vastly outperformed traditional tobacco, with net revenue coming in 8.7% higher versus 3%. This latest growth spurt has brought the total contribution from NGPs to £101m. Yet, it’s worth noting that it’s still only around 3% of the net revenues generated by traditional tobacco.
Given that NGPs are the future of the firm’s business model, this progress is encouraging. And when paired with a £1.25bn drop in net debt, I’m not surprised to see Imperial Brand’s share price climb.
Taking a step back
As encouraging as this performance has been, I still have some reservations. The regulatory environment surrounding these businesses continues to heat up. Earlier this year, the US Food & Drug Administration (FDA) announced a new proposed ban on menthol and other flavoured cigarettes – a move UK regulators performed back in 2020.
This proposal has yet to be confirmed into law. And it’s possible that it may not pass. However, research indicates that such a decision could prevent 500,000 deaths per year. Needless to say, that’s quite a tough argument for Imperial Brands and other tobacco companies to beat. And if the ban goes through, Imperial Brands’ growth will undoubtedly be adversely affected, as will its share price.
Time to buy?
Ignoring the moral implications of investing in a tobacco business, I’ve always seen Imperial Brands as a reliable source of dividend income. And while that might still be true today, the continued and rising pressure from regulators is undeniably making life hard for this industry. And I’m starting to question whether the group’s dividend policy may be in trouble in the long run. As such, I’m no longer considering Imperial Brands for my portfolio, even after today’s share price rise.