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Imperial Brands - time to light up...

By Chris Bailey | Thursday 28 September 2017

Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

I have never smoked and have no plans ever to but I am enough of a libertarian to take the view that if individuals want to light up after knowing everything that medical science has discovered about tobacco over the last couple of generations then that is their business. And so I do periodically invest in the tobacco sector.

Which brings me nicely to Imperial Brands (IMB) and its trading update today which boringly sounded absolutely fine, with the company opining that:

'We are on track to meet earnings expectations for the full year at both constant currency and reported exchange rates'

Well good for it. Given it was only a few weeks ago that the global tobacco sector was hit by some leftfield comments coming out of the United States that regulators were considering forcing a nicotine reduction through, to read this was a net positive. So why then is Mr Market worrying with the shares down a couple of percent today to levels almost back to that recent 3200p support level? It may be something to do with this:

'We continue to invest behind our strategy to drive sustainable growth in a particularly challenging industry environment. The impact of this investment on earnings is mitigated by our cost programmes, pension scheme restructuring and ongoing efficiencies'

Now that should be no news at all. Of course the industry environment is tough with everyone and their mother saying you should not smoke, governments noting the addictive nature of tobacco products provides a nice backdrop to lob on some extra tax levy and, of course, the lack of real wage growth - especially among the demographics that are more often than not cigarette and related users.

The better news for investors - anticipating the 10% increase in dividends target the company has talked about for a while now - is that the company is doing the right thing in finding efficiency gains to plough back into marketing and product innovation. All that new vaping and e-cigarette stuff does not come cheap you know especially as Imperial is playing a bit of catch-up in those areas.

So sensible moves by the management which will not go unnoticed by oft-quoted suitor Japan Tobacco. You should never invest anticipating a bid because you are bound to be disappointed waiting around. That's why this is just the icing on the cake for my buy instinct on Imperial Brands. Just don't force me to try any of its products.

Chris Bailey is the editor of Financial Orbit

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