Is Imperial Brands the best investment opportunity of 2022?

James Reynolds looks into the British tobacco company, Imperial Brands, and finds what he thinks to be an excellent opportunity for 2022.

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On Tuesday, British tobacco company Imperial Brands (LSE: IMB) announced that it has seen better-than-expected profits for the year.

But the firm has said that this year’s boost in profits “strengthens the foundations” of the firm’s five-year plan, which will include further internal reorganization next year.

Does this mean 2022 could be the year Imperial Brands makes a comeback?

Plans for 2022

Imperial has announced a slew of new plans through which it hopes to reinvigorate the company and ‘create long-term value’.

The first of these plans is to refocus on its five most profitable markets: the UK, the US, Australia, Spain, and Germany, which are responsible for 76% of Imperial’s sales.

The second plan is to simplify its operations, which Imperial hopes will cut inefficiencies. 

Thirdly, it plans to invest in new market opportunities. According to Imperial’s note to investors on this strategy, it believes that while new market opportunities may be small, the profit margins are much larger. It is unclear if Imperial means new products or new international markets, but given the plan to reduce its international footprint, I’m inclined to think it’s the former.

Share price, revenue, and debt

Imperial Brand’s share price has performed very poorly in recent years. Currently trading at 1,573p it has lost nearly 70% of its value since 2016. But the company has remained profitable. Until recently it sold tobacco products in almost every country in the world and still has a market cap of £14.8bn. In 2020 it saw revenues upwards of £32bn and six months through the 2021 financial year, Imperial has earned £15.6bn.

Imperial also has very low levels of debt when compared to revenue. In 2020, debt accounted £11.4bn on the balance sheet, a number which has been reduced to just £11bn so far this year.

Operating profit still remains low at £1.6bn but has increased 77% from 2020. Imperial credits rising cigarette prices and the exit from the Russian and Japanese markets for this increase.

All of these numbers point in the right direction. In my opinion they reveal that the company is still in good financial shape and willing to make difficult choices to maintain that strength.

Tobacco business

Tobacco is an unusual business to say the least.

Cigarettes have been steadily declining in popularity in large parts of the world. Younger generations in the UK and US are far less likely to smoke than their parents. This is even accounting for e-tobacco products. In the UK particularly, heavy taxes are levied on these products to actively discourage their use.

But a tobacco customer is often one for life and few products inspire such consistent brand loyalty either. If taxes rise on other products, it’s not unreasonable to assume that a customer would switch to a cheaper brand. But I have it on good authority from my smoker friends that they like the brand they like and that’s largely the end of it. Even if taxes do go up.

Conclusion

Imperial Brands has some very solid fundamentals. It has low debt, high revenue, and a loyal customer base. I like that Imperial has a five-year plan and is pivoting towards aspects of the business that make money.

There’s no guarantee that it will work, but the commitment to a high dividend yield makes for a good consolation prize.

I plan to add Imperial to my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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