In today’s volatile financial markets, I want my portfolio to at least maintain its value.
London-listed FTSE 100 stock Imperial Brands (LSE:IMB) manufactures and sells a wide range of established tobacco products, such as John Player Special and Rizla. It is also expanding in the growing market of Next Generation Products (NGP), such as vaping devices. In 2022, tobacco is proving to be as defensive a sector as they come.
During the market carnage of the last three months Imperial Brands’ share price has actually increased from £15 to £18 a share, indicating that investors feel in a time of war, Covid-19, interest rate rises, potential recession and a cost of living crisis, that the company’s customers will continue to purchase their ciggies.
Half-year revenues reflect this, increasing 0.3% to £3.5bn overall, with NGP growing by 8.7%. Underlying profits rose 2.9% to £1.6bn.
The company has greater scope to raise its prices in the current high inflation environment than the sellers of big ticket items like vehicles and electronic goods, as the financial outlay for tobacco products is so much smaller.
Furthermore, the shares currently yield 7.7%, which is a nice bonus to the rising share price. Interest rates may be increasing globally but you’d still be lucky to get 1.5% interest on your cash.
Another factor that arguably provides a safety net for the share price is that Imperial Brands is one of the smaller global tobacco companies and considered a potential takeover candidate for its larger competitors to snap up. With the British pound very weak against the US dollar it would make more sense to a major American player like Philip Morris International to buy it than it would have done historically. However, it should be noted that takeover speculation frequently does not end in a bid, and competition regulators would likely be involved in the process if one transpired.
Some financial institutions are prohibited from purchasing tobacco shares as tobacco can impact negatively on people’s health and this is one reason for the low price-to-earnings (P/E) ratio of just 7.
A potential risk to Imperial Brands shares is a proposed ban on menthol cigarettes in the USA, but a study in Canada found that after these products were banned there, at least 80% of menthol smokers just moved onto other tobacco products and plenty more managed to obtain menthol cigarettes from elsewhere. However Imperial Brands’ share price would likely be impacted if the ban goes ahead.
The shares went ex-dividend on 26th May 2022 but I am considering buying more for my portfolio due to the high dividend income, a stable share price in volatile markets, growth in the exciting NGP field and the spice of a potential takeover.
As Warren Buffett said, “The first rule of an investment is not to lose money. And the second rule of an investment is don’t forget the first rule.”