Imperial Brands Share Discussion Threads

[creditcrunchies] 09/12/2020 08:26

BATS have done well also looks like Tobacco is as solid as a rock through the Covid pandemic hasn't even dented revenues

[spud] 08/12/2020 15:02

I think we'll all be pleasantly surprised with the price action during 2021 under the current management.

spud

[janhar] 08/12/2020 14:59

Of course there's always the break up/sum of the parts argument at over 20 quid. Have thought about baling out but I know something will happen as soon as I do. Plus the income is attractive. It's like a bond with the added potential of corporate activity

[redbaron10] 08/12/2020 13:54

Imb,BATs,Unilever,Reckitt were among those shares regarded as bond proxys in the low interest envionment post the financial crash in 2008 and the share prices rose significantly.I can only think due to ESG investing that we've seen four, five year declines in BAT and IMB compared to Unilever etc.With their sizeable yields above the likes of Unilever and Reckitt i can only see the ongoing regulatory environment negatively impacting tobacco stocks being the significant risk (if as an investor you're aware this market is mature and slowly declining over time) .All investing is risky but for the dividend cover, and returns here, it's a balanced risk imho.Reducing debt through selling the cigar business and the big saving the company made by slashing the dividend by 33% also are positives here.

[cassini] 08/12/2020 00:29

CreditCrunchies,

Do I interpret your post correctly - you have a strategy of taking the big divi (because, cash) then reducing your holding (entirely? topslice?) on any following rally, then buying back in on any later price weakness whilst not worrying too much about missing one of the two smaller divis?

Sort of a buy-and-hold-and-trade strategy based around capturing at least the big annual divi AND exploiting any flow and ebb of the share price?

[creditcrunchies] 07/12/2020 22:51

BATS average is £24.80 and IMB is £14.73 so I'll wait for the FTSE to top out to build up cash ready for the January/February correction again. The next big divi for IMB is 18th Feb 21 for ex-div date. You kind of need to pouch those then reduce down on any rally back up again because the two after that are much smaller. With BATS their divis are quarterly weighted the same throughout the year

[creditcrunchies] 07/12/2020 22:37

well my tobacco holdings are £100K between BATS and IMB the dividends alone are more than the bloomin state pension and I haven't even retired yet :-)

[cassini] 07/12/2020 18:42

ubastubbs,

Yes it's been a bit of a ride down hasn't it? I managed to have one profitable trade with IMB but mostly just hung on by my fingertips from around the £20 mark. My last buy was at £14.14 but no buys between that and about £19-£20, except for reinvesting the divis.

To be honest I'm a bit overexposed to IMB now and I'm conscious of the need to diversify a bit more. The insurers have been decent high dividend plays until recently, but M&G still yields a similar amount to IMB for example. Diversified Gas & Oil (DGOC) pays over 9%.

With Susan Cooper gone, the debt being tackled, the new broom from Inchcape shaking things up and the encouraging performance during The Plague Year I'm pretty optimistic about IMB for next year. Yes, it's still on the do-not-buy list of New Puritan fund managers but I'm sure the returns will attract others.

Update: I added my divis in my averages at cost instead of for free so my average is £17.79 at yield of 7.74%, which isn't much different to my original calculation but feels much better ;0)

[unastubbs] 07/12/2020 18:02

good post cassini. am in a similar situation. i have bought and sold these succestully in the past from £28 down to £18. but my current entry is £17.50. keep the faith!

[cassini] 07/12/2020 17:55

Spud,

Ta. That's a relief considering they can easily afford to do it.

[spud] 07/12/2020 17:38

Progressive as has been stated. spud

[cassini] 07/12/2020 16:01

I'm into IMB for about £18.40/share on average so I'm hoping it continues to rise!

Sadly, averaging down isn't very effective for me as I bought too many to start with when IMB was higher and the price differential between £18.40 and the current price isn't enough to make much of a difference to my average for the money I can afford to put into it now.

Still, my average yield is 7.5% at the new rebased divi rate and that's not too shabby even though it would have been nice to have done better.

I'm reinvesting the dividends still at this price.

I have a few BATS too - I got into them more recently so got a reasonable entry price and dividend yield (7.75%) on them.

I wonder if IMB will follow a progressive dividend policy in future or just keep the dividend flat for some years?

[bazzerhino] 07/12/2020 15:32

BATS IMB at the top of ftse100 risers

[mrbeaky] 07/12/2020 12:14

Looking good today on pound weakness. Post dividend drop has now been surpassed.

[pineapple1] 06/12/2020 13:05

I contracted out of SERPS in my early 20,s and i transferred that out too a few yrs ago from LGEN into my SIPP . I was surprised how much had accrued over the years.

[gaffer73] 04/12/2020 07:12

Annuities are a complete rip off and should be illegal. Far better off with the new flexible options(let's hope they don't stop them to pay for covid). Regarding transfer of your pension it's very straightforward, just fill a form out and they do the rest.

[cassini] 04/12/2020 02:07

Off topic,

I just had a look at a projection for income from a work pension of mine from a few years ago. The provider only seems to give the options to either buy an annuity at retirement (plus lump sum) or go for drawdown of the capital.

The return from the annuity using their calculator was a real shocker - 2.7% p.a. from age 65, even less at 1.6% if taken at 55 - maybe it was RPI-linked with those figures, but all the same...

If I lived to an average age I'd get only about 40% of my contributions back as income!

If it was paid out of simple drawdown of a fixed sum of money I could understand that variation in return for differing retirement ages, but if it's invested and working in the stock market then it should be producing returns on an annual basis without touching the capital.

Anyway, that's why I have a SIPP (and stocks like IMB and BATS etc) but I wondered if the process of transferring in a small defined contribution pension (or two) was painful?

[tomleafs] 03/12/2020 15:46

Credit, a prime example of fund management agency bias (ESG etc.) causing herd-like behaviour leading to market inefficiencies that favour the rational individual investor. The result in this case being a 10% yield on a 55% payout ratio whilst reporting minimal disruption from COVID... You don't need much in the way of future growth for a decent return from a starting point like that! :-)

[topazfrenzy] 03/12/2020 15:25

The market likes the new appointment by the looks of it :)

[creditcrunchies] 03/12/2020 14:41

I was looking at a few sample stocks of the managed funds for high income they're buying stocks on PEs over 20, divi yields of 2% and value ratio of 20% basically saying no value left in the stocks. No wonder clients get so fed up of these funds. BATS and IMB with profits being maintained throughout Covid, 8-10% yield, PE in single digits. These two stocks combined are paying over £10,000 in dividends into my SIPP re-invested every year. For value IMB are at 93% and BATS are at 86% so plenty of room on current earnings for capital growth.

[spud] 03/12/2020 11:52

Overlooked High Dividends? 9% Yield From Imperial Brands



Summary
Imperial Brands is a UK tobacco company that also trades in New York. Because it's not a U.S. company, many dividend investors overlook this high yielder.

In May, the company reduced the dividend by a third in an excess of caution and to focus on debt reduction.

In fact, the company did not have to reduce its dividends as they were fully covered by the year's earnings.

The stock took an unjustified beating and now trades at a very attractive valuation.

Imperial Brands PLC (OTCQX:IMBBY) is a UK-based tobacco company with many key cigarette brands in its portfolio including Winston, Davidoff, Gauloises, Kool, West, Fine, and many others.

Imperial Brands trades at a very attractive dividend yield, currently at 10%. Due to the COVID-19 economic uncertainties, Imperial Brands had decided to reduce its dividends by one-third back in May. This reduction was done in an excess of caution by management. In fact, if we look at the 2020 figures, IMBBY did not need to reduce the old dividends as they were fully covered for their fiscal year 2020 (FY2020 ended Sept. 30, 2020).

We will show more details later in this report why the old dividend was fully covered, and that management did not need to reduce it. However, as a result of the dividend reduction, the stock took a huge beating. Today, the stock trades under $19 per share (post ex-dividend 11/27). Before the market crash and the dividend reduction, the stock was trading at $26.75.

Therefore today, the stock trades at about a 30% discount of its pre-COVID-19 price. Is this pullback justified? We will show in this report that this pullback has created a unique buying opportunity.

Recent Financial Performance

Before the COVID-19 pandemic, the dividend payout ratio was at 76% which is not an excessive payout ratio and provided plenty of cushion. Management was planning to grow the dividend in 2020 and talking about how growth had been 10% in past years. All of the comments about the dividend were positive in the 2019 year-end report.

On Feb. 5, 2020, the company issued a press release about some unexpected headwinds. This was due to a ban on flavored vaping products. The press release makes mention of a 10% decrease in earnings per share due to the phasing of inventory write-downs, primarily relating to the US flavor ban. Here, as investors, we should note that most of these write-downs are one-time adjustments, and therefore will not be recurring. Also the negative news impacts only the NGP segment which accounts about 4% of total revenues. This "one-time adjustment" and a reduction to revenues shouldn't have had a big impact on the ability of the company to continue to support the dividend. Remember, the dividend had a relatively high coverage ratio.

On March 31, 2020, the company issued a press release primarily talking about its renewal of its credit facility. The company noted that while the COVID-19 crisis had not yet fully played out, that "there has been no material impact on Group performance to date and current trading remains in-line with expectations."

For the fiscal year 2020's earnings report, the company did indicate that COVID-19 had driven some costs up and had significantly reduced sales in duty free shops at airports.

Even looking at the H1 2020 earnings report from May 2020, it wouldn't seem like a cut was needed.

The company beat previous guidance by 1%. Given dividend guidance and doing better than expected on earnings, one would think that the dividend wasn't at risk.

So Why the Dividend Cut?

The slide above shows why management decided to cut the dividend. Earnings decreased right around the amount that management had estimated, but due to continuing uncertainty about COVID-19, they decided to prioritize debt reduction, and raising cash to invest in non-traditional smoking products. This is despite the fact that they had just gotten a new credit facility that they had not yet drawn on. The dividend reduction was by 33%. For sure, the uncertainty with COVID-19 played a big role in this decision, and I believe that management did the right thing. This can be explained by the fact that for many European companies, management tends to be more conservative and does not hesitate to reduce the dividends in uncertain times. Dividend reductions are not as frowned upon as much in Europe as they are in the United States.

The question remains, did the company cut the dividend because it wasn’t generating enough cash to pay it? Or did the company cut it in an excess of caution to strengthen the balance sheet?

The main difference between the reported earnings and the adjusted earnings was that the adjusted earnings backs out a large non-cash charge from write downs on intangible assets. So adjusted earnings will give us a better idea of how much actual cash Imperial Brands had to pay dividends. For fiscal year 2019, Imperial had adjusted earnings of 272.3 pence per share and paid dividends of 206.6 pence per share, for a payout ratio of 76%. For the fiscal year 2020, the adjusted earnings per share was 254.4 pence. While adjusted earnings saw a decrease from the prior year of 6.6%, it still more than covered the previous dividend payment without the need to reduce it. In fact, the old dividend coverage was at 81%. Clearly this company did not have to reduce its dividend. It was a preemptive move to preserve cash in uncertain times.

The Pullback Opens the Door for a Unique Buying Opportunity

Let us take a look at the 2020 full year results. Operating earnings were down by 6.6%. Does this justify a pullback in the stock by 30%?

It sure does not. Investors have panicked as a result of the dividend cut resulting in a very cheap valuation and a unique buying opportunity.

The Future Outlook

The slide above is the revised guidance for FY 2020 issued in May. Given that the dividend is reduced by a third, it looks like the guidance provides plenty of support for the dividend. The payout ratio is now around 55%, much better than the 76% we saw in April, and even better than the 70% from a few years ago.

Earlier in the year, Imperial thought the increase in volumes was a temporary response to COVID-19 lockdowns and customers being afraid they would run out. But so far much of the trend in increased volumes have continued, as reported in their last status update on October 8th.

On Nov. 17 Imperial released their latest earnings report, for their fiscal year ending Sept. 30, 2020, providing full-year results for FY2020. Imperial raised its prices which had a positive impact on revenue (and profits too). Also, tobacco volumes declined significantly less than expected. This is actually quite common with tobacco companies – volumes decline, but price increases are enough to produce modest gains in revenue and profit. The big unexpected hit to revenue came from the NGP segment, in particular the sale of vaping products in the US due to a flavored products ban. On a good note, much of the negative impact was mitigated in H2.

This slide above shows the changes in operating profits from 2019 to 2020. The biggest negative impact is due to the ban on flavored vaping products in the US. But also note that the response to COVID-19 also resulted in increased costs (to implement various protocols to slow or inhibit the spread of the virus). Notice that unlike the Adjusted Operating Income, the Reported Operating Income was actually quite a bit higher this year because last year had a big write down for the sale of the cigar division. The proceeds from that sale were used to reduce debt levels.

The slide above shows how each of the major regions did on volumes between 2019 and 2020. Notice that the volumes in Europe declined quite significantly. Imperial has a fairly large sales volume in duty-free shops at airports in Europe, so with air travel down so significantly, it hit their sales in such shops very hard. Even with that unexpected hit, volumes still dropped less than expected. Apparently, with folks staying at home more due to COVID-19, they smoked more.

Imperial is guiding for a low to mid single-digit growth in operating profit which will provide even better coverage for the dividend. Management does not expect any significant recovery in the duty free segment and expects volume declines to return to more normal (and thus faster) levels. This is generally a slight improvement to their outlook from earlier this year.

Very Attractive Valuation

Imperial reduced their adjusted net debt by £1.1bn. Reported net debt declined by £0.8bn after including £0.3bn of lease liabilities due to the adoption of IFRS16, a new accounting standard. This allowed Imperial to reduce their Debt to EBITDA ratio to 2.7x from 2.9x a year ago.

Considering the dividend yield as a proxy for value, we can see that the current yield of 9.2% is significantly above the average over the last three years. While the market has responded quite positively to the latest performance numbers from Imperial’s management, the stock remains greatly undervalued.

FY 2020 adjusted earnings were 254.4 pence or $3.36. With the market price of around $20, that gives a P/E ratio of just 6 times. That is significantly better than the P/E for Altria (MO), which trades over 9 times earnings.

Another important valuation metric (other then the P/E ratio) is Enterprise Value / EBIDTA (or EV/EBITDA). This valuation metric is very important because it takes into account the "debt level" of the company to derive its valuation. Imperial Brands' EV/EBITRA ratio stands today at a very cheap level of 7.3 times. Altria is also cheap using this metric at 8.4 times, but it's still 15% more expensive than Imperial Brands.

Price Target

As of November 23, 2020, there are 17 banks and analysts who cover the stock with a consensus rating of "BUY" on the stock, and an average consensus price target of $25.94, suggesting a ~40% potential upside from the current price.

At $25.94/share, this would put the valuation of IMBBY at a P/E ratio of 7.8, which is very reasonable and even on the cheap side. We should note that IMBBY traded well above $26/share earlier in 2020.

Bottom Line

Imperial Brands reduced its dividends by 33% earlier this year in a conservative move following uncertainties of the pandemic. As we have shown above, the company did not need to reduce its dividends as they were fully covered based on the 2020 earnings. As a result of the dividend cut, investors panicked and the stock took a huge beating. It's trading today at a 30% discount to its pre COVID-19 price. This is clearly an overreaction because its operating earnings only declined by 6.6% and are expected to grow back up next year. Management made good use of the cash they retained. They reduced debt significantly and increased share buybacks. Today the stock yields ~10% with a payout ratio of 55%. This is a dividend with a high level of safety. The pullback has resulted in very low valuations as evidenced by its P/E ratio of 6 times and an EV/EBITDA valuation of 7.3 times. Analysts have a price target of $25.94 suggesting a 40% upside from here. Income investors should take advantage of this unique opportunity to juice up the yield in their portfolio.

spud

[irenekent] 03/12/2020 09:51

Moving this stick to an upward trend is akin to reversing a juggernaut that has just fallen off a cliff. But I am still hopeful.

[redbaron10] 02/12/2020 22:32

Philip Morris has upped its FY forecasts,having increased its dividend previously.A buyers' strike of this stock continues,but the yield is the one big positive for income investors like myself.Negative yielding bonds are of no interest (literally) to me.