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Bullish smoke signals from Imperial Brands

By Chris Bailey of Financial Orbit | Wednesday 9 May 2018


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 was too early with my positive call on Imperial Brands (IMB) that I shared with you back in November .  Sure I have picked up some dividends but it is capital growth you all really want.  Today's half year numbers however highlight why this name should be in your portfolio even if - like me - you are not a user of their products.  
 
You see, Imperial Brands is all about cash flow and dividends.  Yes you have to be comfortable with the moral underpinnings of tobacco and related products.  My view is between free speech, material information disclosure, advertising and sales restrictions plus the government's material tax policy you have enough safeguards.  So back to the company and its recent performance. 
 
The best news from today's update is the reiteration of the 10% annual dividend increase pushing the yield north of 6%.  And how can it finance this and continue chivying down its net debt position?  Mostly price increases that are progressively impacting more and ongoing cost cuts.  Tobacco is no longer a volumes game although I do note the company continued to have 'stick volumes' that outpaced the broader market aided by its material emerging market exposures.  'Premiumisation' is an important trend in many consumer areas and tobacco is no different - and there was big love for Growth brands such as West, Winston and P&S where there even was some volume growth. 
 
So all of this is fine...so why the share price swoon over the last year?  Step forward a general belief that Imperial Brands is shabbily positioned in the world of next generation tobacco products.  What was particularly noteworthy about today's presentation were the pages and pages of the document issued by the company dedicated to try and refute this. To me they are not that badly positioned here with its myBlu range giving them a foothold.  I would say they are behind some big industry peers like BATS (BATS) and Philip Morris International (of the US) but neither of these two groups are trading on Imperial Brand's multiple...nor are they flawlessly executing in this space either.  My view is that in these market shifts it is about managing the change and Imperial Brands is doing okay on this front. 
 
I think the aspect of the numbers that may have helped the shares the most today (up 4% as I write) was the assertion that Imperial Brands is looking to sell £1-2bn worth of non-core brands and related over the next couple of years.  This is the type of extra focus that the market likes and is perfectly consistent with premiumisation and general shifts to next generation products. This is an ongoing process - five years ago the company had 250 brands and is aiming to halve this by the end of the next two years and is currently at just over 160). 
 
Put it all together and I am sticking with my thoughts of last November that the shares should be in the £30s at the very least.  I remain a non-user of their products...but a buyer of their shares. 


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