Shares in tobacco firm Imperial Brands (IMB) dropped 7% to £15.36 after it reported an 8.5% fall in first half operating profits on disappointing sales of ‘new growth products’ and reduced its dividend.
While revenue from its core tobacco business grew 0.9% to £3.5bn, sales of new growth products such as vapes slumped 43% to just £83m, continuing the weakness seen last year.
Overall, the firm said the pandemic had a minor impact on trading in the six months to the end of March but it expected it to be ‘more pronounced in the second half due to continuing pressures on our duty free and travel retail business.’
It also predicted that changes in consumer spending could see further ‘downtrading’, which would damage sales of higher-priced brands.
REMEDIAL ACTION
Given that the tobacco business is generally fairly defensive, Imperial expects the pandemic to have a ‘low single digit impact on earnings per share’ on top of the 2% decrease which it predicted in its February outlook.
The firm managed to increase prices by an average of 6.7% in the first half to offset the fall in cigarette volumes, but this was largely negated by a weaker market mix in the Middle East and Australia and a weaker product mix as customers downtraded in the UK and Germany.
Meanwhile, poor returns on ‘new products’ - especially in the US where the firm had to take a £48m write-down following a ban on the sale of flavoured vapes - has forced it to bite the bullet and cut investment in this area.
Despite agreeing the sale of its premium cigar business for €1.2bn, Imperial’s net debt adjusted for lease accounting still rose by £518m compared with a year ago.
Therefore it has ‘modified’ its capital allocation policy, cutting the annual dividend by a third to 137.7p for this year with the promise of a ‘progressive dividend policy’ thereafter in order to reduce its gearing to the lower end of its target of 2 to 2.5 times net debt to EBITDA (earnings before interest, taxes, depreciation and amortisation) by the end of 2022.
Given that the shares were theoretically yielding 11.5% before today’s announcement, it would seem the cut was widely anticipated. Yields of 10% or more are usually a sign that the market is predicting a cut.
Following today’s price fall, Imperial shares are trading on a prospective yield of 9% which is still at the upper end of the range for FTSE companies.
