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Should you buy Imperial Brands as it launches share buybacks and pledges “progressive” dividends?

Shareholders over at Imperial Brands (LSE: IMB) and British American Tobacco (LSE: BATS) haven’t had much to celebrate recently.

Price declines of between 25% and 33% in the past 12 months have reflected rising concerns over the future of e-cigarettes and those non-combustible goods long tipped as the saviour of Big Tobacco.

Slowing demand in key markets like Japan has cast doubt on whether these next-generation products can really offset the terminal decline of Imperial Brands et al’s traditional products, whilst a step-up in regulatory action — from the banning of vaporisers to restrictions on sales to younger people — in significant regions such as the US has added more coal to the fire.

Share buybacks on the way

I for one believe these issues, allied with that terminal decline in the tobacco market, make these FTSE 100 firms ones to avoid. With their poor profits outlooks come big doubts over whether they can keep paying massive dividends, naturally.

However, Imperial Brands took steps this week to soothe these fears by plans to keep paying big shareholder distributions in the near term and beyond.

So what did the company advise? Well whilst affirming plans to hike the final dividend by 10% in the current fiscal year it refused to put a figure on how much it’ll be hiking rewards thereafter, Imperial Brands simply stating that its policy would remain “progressive” and would take into account “underlying profit performance.”

Instead, the business is to put a bigger emphasis on returning cash via share buybacks and pledged to repurchase £200m worth of shares in fiscal 2019 alone. Imperial Brands has said that the move reflects its “continued strong cash generation and the importance of growing dividends for shareholders, while providing greater flexibility in capital allocation.”

The tobacco titan said that this more flexible approach will allow it to pursue organic investment in its tobacco stable and next-generation products (NGPs) like the blu vapour ranges, a critical decision given how Imperial Brands lags its rivals in this field. It also said that the programme would allow it to pursue M&A opportunities to bolster its NGP portfolio.

Worth the risk?

I wasn’t celebrating Imperial Brands’s latest decision, though. Forward yields sit at a titanic 10.4%, a figure which smashes the FTSE 100 average of 4.5% to smithereens. It stands to reason then that the business should use some of this excess capital to safeguard its long-term profits picture through product investment.

But will this be enough to help the business stem the tide? The fight against tobacco continues to intensify, illustrated by a leaked government plan to phase out all cigarette demand in the UK by the end of the next decade. And as I said, the fight against the non-combustible product segment is clicking through the gears as well, undermining the big plans of Imperial Tobacco here.

So forget about the company’s 10%-plus yields, I say (as well as the 7.1% corresponding yield on offer from British American Tobacco). There are plenty of big yielders out there with much less risk to buy today.

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Royston Wild 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.