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Imperial cuts dividend to pay debt

Tobacco giant expects second half of year to worsen, with a hit to travel retail
Imperial cuts dividend to pay debt

Imperial Brands (IMB) has slashed its half-year dividend by a third to 41.7p, in a bid to lighten its £14bn debt load. The tobacco giant said the uncertainties caused by the coronavirus pandemic and the regulatory scrutiny of its industry “reinforces the importance of a strong balance sheet to underscore the defensive characteristics of our business”.

IC TIP: Sell

The reduced payout implies an annual dividend of 137.7p for 2020. Imperial intends to pursue a progressive policy from that revised level. It stressed that all savings would be used to knock gearing down to the bottom end of its 2-2.5 times target range by the end of 2022. And, arguably, the group has already made progress on that ambition; in late April, it unveiled the disposal of its premium cigar businesses for £1.1bn gross of tax.

But Imperial faces extreme pressures. Over the six months to March, its next-generation product (NGP) portfolio endured a 44 per cent contraction in net sales to £83m, reflecting lower inventories in the supply chain and health concerns in America about ‘vaping’ products – something compounded by the US Food and Drug Administration’s (FDA) decision to ban flavoured ‘pods’. Imperial noted that those announcements have bred “contagion” in European markets – unfortunate terminology.

By comparison, tobacco net revenue was flat at £3.5bn. But while Covid-19 has only had a minimal impact on trading so far, Imperial expects this to be more apparent in the second half of the year – exacerbated by pressures on the travel industry, not to mention possible changes in consumption patterns, including downtrading. This health crisis has, after all, triggered an economic recession.

Further down the income statement, adjusted operating profits slipped by 7.7 per cent to £1.5bn – dampened by lower NGP sales, impairment charges and greater provisions for slow-moving inventory.

Panmure Gordon expects adjusted EPS of 259p for 2020, down from 273p in 2019. Imperial’s dividend cut came earlier than the broker had expected, although it remains bullish – arguing that the market can now focus on an implied yield of 8.3 per cent, “which will be well covered”. That yield moved closer to 9 per cent on the back of these results, as the market reacted with disappointment.

IMPERIAL BRANDS (IMB)   
ORD PRICE:1,512pMARKET VALUE:£14.3bn
TOUCH:1,511-1,513p12-MONTH HIGH:2,256pLOW:1,258p
DIVIDEND YIELD:12.3%PE RATIO:17
NET ASSET VALUE:451p*NET DEBT**:£14.1bn**
Half-year to 31 MarTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)***
201914.41.0271.262.56
202014.70.7955.641.70
% change+2-23-22-33
Ex-div:28 May; 20 Aug   
Payment:30 Jun; 30 Sep   
*Includes intangible assets of £18.2m, or 1,928p a share
**Includes lease liabilities of £302m
***Dividend to be paid in two instalments of 20.85p