The Motley Fool

Why I’m considering selling Imperial Brands plc

Imperial Brands (LSE: IMB) is one of the FTSE 100’s dividend champions. The tobacco company has a reputation for slow and steady returns, and management is committed to returning a significant amount of profits to investors via dividends. 

Indeed, at the time of writing shares in the company support a dividend yield of 5%, which is a little more than 1% above the market average, and the payout is covered 1.6 times by earnings per share. Also, management has committed to payout rises of 10% per annum for the foreseeable future.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

But despite Imperial’s dividend attraction, the company’s fundamentals are mixed. As one of the world’s largest tobacco companies, it makes billions from the sale of high margin cigarettes. While this business has historically been extremely lucrative, attitudes towards smoking are changing rapidly and Imperial, which is developed market-focused, is suffering.

Falling profits 

Imperial’s half-year results for the six months ended 31 March, clearly show that the company is having problems. While headline figures all showed growth thanks to the depreciation of the pound, on a constant currency basis, tobacco net revenue declined 5.5%, adjusted operating profit fell 7.6%, and adjusted earnings per share fell 5.9%.

Management is all too aware of the decrease in tobacco sales around the world, and they have pushed the firm into other businesses in an attempt to diversify. The group’s Fontem Ventures division is responsible for Imperial’s e-cigarette development and recently-launched caffeine products, but these are still relatively tiny parts of the overall business.

The rest of the tobacco sector has been experimenting with so-called reduced risk products, primarily heat rather than burn technology that reduces the amount of toxic chemicals released from cigarettes. Peer Philip Morris has spent $3bn developing this technology. After launching its first product in Japan last year, the company has sold millions of them.

Imperial has stayed away from this avenue so far, and a reluctance to enter this market could cost the company hundreds of millions of dollars as health-conscious consumers stub out cigarettes. Imperial can ill afford to miss out on this opportunity. As noted above, the company’s revenue and profit is already coming under pressure, and management quickly needs to come up with new ways to reignite growth. A weaker pound has helped temporarily boost profits, but this may not last forever.

Mixed outlook 

Considering all of the above, while it looks like a good dividend stock today, the company’s long-term potential remains unclear. The market seems to hold the same opinion, as shares in Imperial currently trade at a forward P/E of 12.8, which makes it one of the cheapest consumer goods stocks in Europe.

Whether or not the market can regain confidence in the company depends on management’s next moves. The company needs to find new growth opportunities or earnings will continue to slide, jeopardising both the company’s dividend objectives and its actual existence.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Rupert Hargreaves owns shares in Imperial Brands. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.