Half-time figures this morning from Imperial Brands (LSE: IMB) left the share price almost unchanged.
But near 1,861p, the smoking products maker has already plunged a long way since the 4,000p level it achieved in 2016.
To put that move in perspective, the price is around 9% higher than a year ago. And prior to dropping back a bit this year, it had been clawing up from the lows hit in 2020.
One consequence of the stock’s weakness is the elevated dividend yield.
City analysts predict mid-single-digit percentage increases in the shareholder payment for this year and next. And puts the prospective yield at just above 8% for the trading year to September 2024.
That’s tempting, right? And apart from a little wobble in the pandemic year of 2020, Imperial has been a robust dividend-raiser for years.
Ongoing risks
The industry is known for its defensive, cash-generating characteristics. And without wishing to sound crude, the business has been awash with cash for as long as I can remember.
But there are risks for private investors to consider. And one of them is the trend of declining investor sentiment. I’d argue that investment institutions might have been shunning the tobacco company’s shares. And that’s because of ethical concerns about the product and its addictive and harmful nature.
Indeed, the major shareholder list looks a bit thin to me considering the stock is large and liquid.
But the other elephant in the room for tobacco businesses is the way the industry attracts regulatory scrutiny. And on top of that, there’s a fair chunk of debt on the balance sheet to think about.
We could argue that private investors need decent compensation from the dividend because of the risks they run by holding the shares. After all, regulators have the power to pull the rug from under the industry whenever they choose. And life could become very difficult for the Imperial Brands business.
Nevertheless, today’s numbers are encouraging. Revenue, earnings and the dividend are all higher for the six months to 31 March. And the net debt figure is a bit lower. It seems that most indicators have been moving in the right direction.
Targeting better financial delivery
Chief executive Stefan Bomhard said the business is working towards better operational and financial delivery. And he said the directors are “committed” to an ongoing programme of shareholder returns. For example, the company plans to complete an “initial” £1bn share buyback during the second half of the year.
Business performance for the tobacco category in the period was “resilient” with market share and pricing gains, Bomhard said. And that helped to mitigate industry volume declines. And Imperial has achieved stable or growing aggregate market share in the last four six-month periods “after many years of sharp declines.”
Meanwhile, the Next Generation Product (NGP) category continued to grow and the company launched new vapour, heated tobacco and modern oral products in the period.
Bomhard thinks the business is on track to deliver acceleration in adjusted operating profit growth in the second half.
If this stock was in any other industry, it would look like a steal. But to me, Imperial Brands demands deep and careful consideration before flirting with its attractions.
