Imperial Brands Share Discussion Threads

[muscletrade] 22/2/2020 12:16

@daneswooddynamo22

you make a good point particularly with respect to Vodafone, which is why I don't dismiss that it could happen with IMB. I was wrong about Voda (mostly because I believed in what Nick Read said at the time) and I could be wrong here too, but as you point out they are not exactly the same animal and Vodafone was being fronted with billions for spectrum and 5G costs

Voda share price is still lower than when the div was cut, even though it continues to gain ground and I still hold.

As you say we will find out in due course.

[daneswooddynamo] 22/2/2020 12:01

Nick Read at Vodafone said much the same several months before they slashed by 40 percent. Obviously Vodafone’s dividend cover was less and the massive spectrum costs made it inevitable. IMB’s cash flows are much more robust but it still doesn’t mean that cutting by 30-40 percent is not a sensible plan if they can retire debt quite quickly. Rebasing to 7 percent would still make it a top ftse income stock and probably the only one paying that sort of yield which would then be very comfortable and able to grow.

Which other 7 percent plus FTSE yields are comfortable? HSBC, RDSB, BT are all going nowhere and have massive issues to deal with and in capital terms Vodafone has jumped 25 percent since it cut...

I think most of the posters here think that IMB is significantly undervalued. We just seem to differ sharply on what happens to the shares if they do cut. We will find out in a few months unless perhaps IMB finds itself on the end of some sort of approach

[muscletrade] 22/2/2020 11:52

@ lendmeafiver. "They won’t cut the dividend, they will just cut its growth" I agree and indeed the company has already indicated as much

@redbaron10."Jefferies said the group had announced it had no plans to change its dividend policy" I have not seen that announcement but hope it is accurate. Has anyone here other than Jefferies actually read this announcement?

The company has actually adjusted its dividend policy as it was "progressive " (ie 10pct annual growth) but ex CEO rowed back on that...date escapes me now but could find it if I had to.

[redbaron10] 22/2/2020 11:33

In the Telegraph business section....'Tobacco giant Imperial Brands inched back upwards following a more than 7pc fall on Thursday.It closed up 20p at £17.29 after analysts at Jefferies said the group had announced it had no plans to change its dividend policy'.Make of that as you will.

[lendmeafiver] 22/2/2020 10:59

They won’t cut the dividend, they will just cut its growth. Do you really think so many board members would recently be parting with hard cash to buy more stock if there was a unnecessary dividend cut coming.

The recent levels of capex are also more than enough for the new ceo to sort out the NGP’s and I expect we will see some creative thinking from him once he gets started that may positively surprise.

[sonofbanjosinger] 22/2/2020 10:48

Agree with Spud if the dividend is cut the price will drop to create a new 10 percent plus yield.

[muscletrade] 22/2/2020 10:40

While a div cut may happen I agree with Spud it is not necessary and the share price will be damaged unnecessarily. it will/may recover over time but what would have been the point.The balance sheet may look a little prettier(but not if share price is trashed) but repeat repeat repeat the debt level is not really an issue

No one owns a tobacco share for any other reason than income and this "first directive" needs to be foremost in new managements minds. I daresay/hope every uk income fund and income trust manager will be telling them the same.

[spud] 22/2/2020 10:22

Any divi cut would wipe billions off the share price as income investors such as myself walked away. The Company simply doesn't need or have to.It's an income stock and always has been.spud

[wskill] 22/2/2020 10:21

Yes I do hope that the man at the helm does cut the dividend around a 20% cut would put us on the same level at Bats in paying down debt.

40% cut is not required in my view but will certainly make the debt disappear in short order,pity is things have been allowed to get into this position mainly due to the unwarranted salaries and bonus levels of the directors .

There noses have been in the trough for too long a good clear out will do IMB a lot of good.

[daneswooddynamo] 22/2/2020 09:59

Personally I think a dividend cut of 30-40 percent is nailed on. An easy decision for the incoming chief exec. The shares would still be yielding 7 plus percent at current share prices and it would mean resources available to start making a meaningful dent in debt levels and additional investment in new product areas/reorganisation. Debt financing is comfortable at the moment but the absolute debt levels are still high and no-one is going to complain if they can be reduced. And if things go well he can start decent dividend growth again from a lower base making him look good. The market knows it and once it happens the shares will rise not fall as the shorters move on. No point struggling to maintain current dividend and existing debt levels, the market will just keep speculating on a cut and the shorters will not let go.

[muscletrade] 22/2/2020 09:57

@kiwi

1.Thank you for posting that note from simply Wall Street. The first para is a little bizarre in my view as it intimates that all IMBs debt is due within the next 12 months.
This is not the case of course. A quick perusal of page 46 of IMBs 2019 preliminary results published in November 2019 provides detail of IMBs bond issues which stretch out as far as 2032.
It is alarmist to imply as Simply does in their first few paras that all debt has to be repaid virtually immediately and dilution is a possibility. IMBs debt will be continuously refreshed as individual bonds mature and at hopefully lower rates.

2. As I tried to point out in my thoughts last evening IMB has coped very well with debt for many years(their cash conversion rate is excellent)and in fact even as debt has increased over the years their interest payments have not and are less than they were in 2013 (and similar to 2012) so I am not quite sure why on the one hand Simply Wall Street are "nervous" about debt on the one hand yet they are more reassuring in their final para.
If there was/is going to be a sudden spike in long term interest rates for the future then IMB would have to cope with those higher rates like everyone else but there is very little sign that this is about to happen very soon. in fact the opposite is the case

3. it may well be that I am missing the point somewhere and I am misunderstanding the problem, if so I welcome any feedback. It is exactly because of those sort of comments like Simply y Wall Streets first para that I decided to do my own analysis. If I hadn't I would be very alarmed. As a result I am not..... unless someone can explain to me why I should be more concerned. :)

AS Simply says at one point "Imperial Brands actually produced more free cash flow than EBIT over the last three years" perhaps they should have said for 10 years or 20 years rather than just 3 and in fact more than enough to pay substantial levels of cold hard cash in dividends at the same time as well as very slowly reduce debt

[kiwi2007] 22/2/2020 04:24

How Strong Is Imperial Brands’s Balance Sheet?

The latest balance sheet data shows that Imperial Brands had liabilities of UK£12.4b due within a year, and liabilities of UK£15.8b falling due after that. Offsetting this, it had UK£2.31b in cash and UK£3.01b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£22.8b.

Given this deficit is actually higher than the company’s massive market capitalization of UK£16.0b, we think shareholders really should watch Imperial Brands’s debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Imperial Brands’s net debt is 3.0 times its EBITDA, which is a significant but still reasonable amount of leverage. But its EBIT was about 1k times its interest expense, implying the company isn’t really paying a high cost to maintain that level of debt. Even were the low cost to prove unsustainable, that is a good sign. Imperial Brands grew its EBIT by 7.9% in the last year. Whilst that hardly knocks our socks off it is a positive when it comes to debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Imperial Brands’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Happily for any shareholders, Imperial Brands actually produced more free cash flow than EBIT over the last three years. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.

Our View
While Imperial Brands’s level of total liabilities has us nervous. For example, its interest cover and conversion of EBIT to free cash flow give us some confidence in its ability to manage its debt. We think that Imperial Brands’s debt does make it a bit risky, after considering the aforementioned data points together. That’s not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. Take risks, for example – Imperial Brands has 3 warning signs we think you should be aware of.

[lendmeafiver] 21/2/2020 20:53

Don’t know what cash flow multiple the post is referring to, on an eps basis Imperial is much cheaper.

Good post from muscle also.

[eeza] 21/2/2020 20:22

There was an interesting post on the BATS thread earlier today.

micha14 21 Feb '20 - 14:58 - 3559 of 3561
When i look at Imperial i find it trades at same CF multiple as BAT yet BAT has much stronger balance sheet, better management, safer dividend and better emerging market strategy and less egregious mngmnt compensation.

[muscletrade] 21/2/2020 19:54

A few thoughts...

1. IMB announced 10% hit to first half EPS.
2. IMB is second Half heavy so lets assume for arguments sake that the hit is less than 10% for the whole year
3. The 2019 dividend is just about covered even with this reduction and even if it did come up shy then IMB have £3.3B finance headroom for temporary releif and/or could use a little of proceeds from sale of cigar business.
4. Debt is not the real problem for this company(personal view).(although everyone would prefer it to be lower) In 2013 debt was approx £9.7B and interest approx £735M pa. In 2020 debt is approx £12B and interest approx £450m pa.(Interestingly this reduction in interest charges while overall debt has increased has helped fund the dividend increases over the last few years
Even if debt is/was reduced by £1B immediately then the interest savings are only £37.5m pa.
5.The big change to the figures over the last few years is not so much EBIT, or revenue/but the increase in the total dividend which is now £1.9B compared to £1.5B in 2017.
6 I would suggest that the dividend should/could be maintained at current levels until temporary problems resolved and that IMB revert to more modest div increases in the future once normal/better service is resumed with new and able management.
Not surprisingly this is pretty close to what IMB are already doing/said, and then we can also get back to routine debt reduction of about £750m.pa
7. I would not be surprised to learn that the incoming CEO may have suggested that he did not want to start his job with a profit warning and that they should do a bit of kitchen sinking before he arrived..and in a year or two he's a hero.
8. Worth remembering that Tobacco overall is performing well apart from one jurisdiction(which is fixable)and Tobacco is where IMB makes the money. Getting the alternatives /vaping sorted is what is required to fund future increases to dividends.

[rjmb] 21/2/2020 10:05

I believe a figure of $5 or $6 Billion was quoted as the investment probably upto 2 years ago now. They are refining the product constantly so the investment $ continues!

[essentialinvestor] 21/2/2020 08:38

Yes Ian, that may be correct.

I've not looked at PM for an age, aware they have invested extraordinary
amounts in to IQQS.

[pixtel] 21/2/2020 08:37

Lanaken - thanks for the CAGNY presentation link. Worth a read.
Just been through the whole transcript from yesterday where interim CEO continues to promise attractive, sustainable returns, whatever that means.

He says low single digit earnings growth is on the cards. What that means for dividend growth he didn't say.

[eeza] 20/2/2020 23:35

Small mention in this article about MRCH (Merchants Trust).

"‘They have the skills to invest at scale into renewable products.’

In a similar state of steady transition, he argued Imperial Brands and British American Tobacco, both in Merchants’ top six holdings, continued to make good profits and benefit, unlike other consumer goods companies, from the effective ban on advertising which has reduced competition and costs.

Further, they are well-placed to succeed in e-cigarettes, particularly as a regulatory clampdown starts in the US this year forcing companies to file 10,000s pages of documents per product.

‘That’s their business model. They understand regulation and they’ve got the money to do it.’

‘We think the dividends are pretty safe,’ he commented, on holding these kinds of companies, but stressed they are investing for total return precisely to avoid the trap of investing companies in irreversible decline.".....more

[eeza] 20/2/2020 23:18

Yes, boring.
:-)

Me & spud trying to find something to worry about.

[spud] 20/2/2020 22:54

I hate it when your (occasionally) right Poopy.....spud