The Imperial Brands (LSE: IMB) share price has shown a clear trend over the past few years.
The trouble is, that trend has been in the wrong direction – down!
The stock topped-out on the chart in the summer of 2016. And at 1,600p, the smoking products maker is now around 60% lower.
Strong cash flow and dividends
But the attraction for investors has been the consistent cash flow driving dividend payments and share buybacks.
However, even those returns will not have overcome the loss in a shareholder’s portfolio due to the decline in the share price.
The big question is, will the stock keep falling? Or can investors now anticipate rebuilding their investment in the company by accumulating dividend income?
It’s been a long time since investors made years-long returns from buying and holding undervalued tobacco stocks as they re-rated higher. But here they are again, unloved and apparently under-valued.
So, can history repeat to give investors bumper gains again? Maybe. But one of the big risks many people have been mentioning for years has just landed.
It’s been understood for a long time that the tobacco industry faces regulatory risk and scrutiny. And laws can be passed to affect the industry in a negative way.
One example is British prime minister Rishi Sunak’s recent announcement.
Sunak wants to raise the age at which people can buy cigarettes in the UK by one year every year in the future “so that eventually no one can buy them”.
This toughening stance from the government may explain some of the recent weakness in Imperial Brands’ share price.
Good geographical spread
The UK is only a part of the firm’s international business. But rules may toughen in other countries in the future. And new laws could affect the company’s next-generation products as well, such as vaping.
Nevertheless, the valuation here looks attractive. For the trading year to September 2024, the forward-looking earnings multiple is just over five and the anticipated dividend yield more than 9.5%. However, valuations can always move lower.
A low valuation isn’t a certain protection against further declines in the share price either. Price-to-earnings ratios of less than two have been recorded in the past for big companies.
But Imperial Brands released a positive-sounding trading statement on 5 October 2023. Trading is in line with previous guidance and the business is continuing to grow its market share. Tobacco prices have been “strong” and the company is seeing “momentum building” for its next-generation products. Revenue is growing across “all categories”.
It’s possible operational progress may drive the shares higher in the coming years. And the directors plan to continue growing the dividend and buying back the company’s own shares.
If Imperial Brands was any other defensive business selling fast-moving consumer goods, I’d probably load up with the shares now. However, the risks here weigh heavily on the valuation. And the business requires careful consideration from investors before buying the stock.
