At the turn of the year, I liked the look of Imperial Brands (LSE:IMB) and chose it as my top UK share for 2020. Sadly, I’m now questioning my choice. It went into a decline from mid-January until the March market crash. By mid-April it had risen 37%, only to head south again. The tobacco giant’s share price has seen extreme volatility this year. It sunk to even lower lows in September and again in November, from which it has now recovered another 28%.
No longer a top UK share
Imperial Brands’ financial year runs to 30 September, and the first six months were disappointing. It took a more disciplined approach to promoting its next-generation cigarette alternatives, reducing its losses in the second half of the year. This led to overall group net revenue being up 0.8%. The menthol ban that came into force in May didn’t have a significant impact on the business, as it only contributed to 3%-4% of its volumes.
Earlier in the year, Imperial Brands cut its dividend to help reduce its debt. At today’s share price, the dividend yield is a hefty 8.7%. However, it’s only covered once by earnings, so if 2021 profits are not as good as hoped, then it could be at risk of another cut.
Imperial Brands has a price-to-earnings ratio below 10, which, along with the high dividend yield, could make it appealing to value investors. Its earnings per share are £1.58.
Growth potential but headwinds are strong
Imperial Brands continues to have some growth potential through its focus on next-generation alternatives to cigarettes. However, sales of these products were down in its latest interim report released in November. Its tobacco sales were showing signs of improving as the lockdown encouraged consumers to increase their spends on entertaining at home. This trend may not continue as normality resumes.
Imperial Brands has been an income fund favourite of institutional investors for decades, but pressure is mounting on them to unload. It’s also facing increasing regulatory headwinds on its e-cigarettes and alternatives to traditional tobacco products.
The business is resilient a result of the addictive nature of its products, but the ethical shift away from investing in tobacco is significant. This means it’s an industry in decline, and I no longer like it as an investment.
A stock with considerable debt
Imperial Brands recently divested its premium cigars business for €1.25bn of which it put €1.1bn towards paying down its debt. It also appointed a new non-executive director. Alan Johnson will take up the position from 1 January.
From an ethical perspective, I’m not comfortable investing in tobacco, having listened to various discussions on the matter. It’s very much a personal choice, but retail investors are shifting towards investments that meet their ethical boundaries. Therefore, I’d not consider buying shares in Imperial Brands in 2021.
There are plenty of great UK shares to buy and I prefer the 2021 outlook for small-cap growth stocks such as Cake Box and Genus or FTSE 250 star PZ Cussons.
