Since topping 4,000p a share three years ago, the only direction for the Imperial Brands Group (LSE: IMB) share price has been down. It’s lost more than half its value since then, trading at around 1,750p, which is quite a comedown for one of the most reliable long-term dividend growth stocks on the FTSE 100.
Smoke without fire
Investors were primed for disappointment today and brushed off the 7.3% drop in pre-tax profits to £1.69bn for the year to 30 September, preferring to focus on the 2.2% rise in revenue to £31.6bn instead. They knew what was coming following September’s profit warning, after President Donald Trump announced a crackdown on vaping and flavoured e-cigarettes, hitting potential sales of Imperial Brand’s myblu.
Today, outgoing CEO Alison Cooper called 2019 “a challenging year with results below our expectations,” with the group hit by tough trading in its portfolio of Next Generation Products (NGP), which were designed to offset shrinking revenues from traditional tobacco products. NGP revenues grew 52.4% to £285m, but Cooper admitted this “was below the level we expected to deliver.”
She blamed the disappointment on an increasingly competitive environment and regulatory uncertainty in the US, while growth in Europe was also slower. Imperial will now prioritise markets and categories with the highest potential for sustainable profitable growth, while waiting to see whether regulatory uncertainties improve.
Fresh focus
Future focus will be on profit and cash generation, with “a more tightly focused business model that will create long-term value for shareholders.” Can Imperial Brands achieve this? It won’t be easy amid a US vaping clampdown, especially if other countries follow its lead.
NGPs were supposed to offset the long-term decline in developed world smoking, but now fresh thinking is required. Today, we learned that Thérèse Esperdy will succeed Mark Williamson as chairman from January, but the search for a new CEO continues.
Tobacco net revenue, meanwhile, rose 2.7% over the year to £7.71bn, but earnings per share fell 1.6% at constant currency to 273.3p.
Dividend delight
In July, the £16bn group started rewarding loyal investors with a £200m share buyback programme for 2019, of which £108m has been completed. That won’t do much to offset the hefty capital losses investors have suffered, but the big consolation in this case is the dividend.
Imperial Brands now offers a quite stunning forecast yield of 11.8%, covered 1.3 times by earnings. That’s a compelling level of income, provided the dividend isn’t cut. In the summer, management announced it was dropping its long-running policy of increasing dividends by 10% every year, something it had managed every year for the last decade. Future payouts will be in line with earnings growth, which disappointed some investors, but seems wise if that makes today’s whopping yield more sustainable.
The other big attraction is its bargain basement valuation, with the stock trading at just 6.1 times forward earnings, well below the FTSE 100 average of around 17 times.
Imperial Brands does carry net debt of £11.37bn, which is another worry. I also believe tobacco is a declining business, but it isn’t declining as rapidly as today’s low share price would suggest. Any good news could send it soaring.