- Tobacco giant’s shares hit an eight-year high
- Strong cash flow funds increased dividends and ongoing share buybacks
- FTSE 100 member embarks upon second five-year plan
“Investors seem to be warming to tobacco stocks, as Imperial Brands embarks upon its second five-year growth plan under new chief executive Lukas Paravicini, having successfully completed the first one outlined by his predecessor, Stefan Bomhard,” says AJ Bell investment director Russ Mould.
“Higher prices, product mix and cost efficiencies are all offsetting the relentless decline in cigarette volumes, while cash flow is sufficiently strong to fund both a fifth straight increase in the annual dividend and a fourth consecutive £1 billion-plus share buyback scheme.
Source: LSEG Refinitiv data.
“It is only two years since Imperial Brands’ dividend yield was higher than its price/earnings (PE) ratio, as investors fretted about the long-term future of the company’s business model, with regulatory pressure and health campaigns continuing to weigh on volumes.
“The shares now trade on roughly 10 times forward earnings with a yield of 5.2%, based on consensus analysts’ forecasts for the year to September 2026, to suggest that investors are becoming more convinced about Imperial Brands’ ability to remain highly profitable and cash generative thanks to efficiency drives and pricing power.
Source: Company accounts. Financial year to September.
“That pricing power comes from the FTSE 100 firm’s array of key brands, which includes JPS, Davidoff and Gauloises, despite regulatory intervention on issues such as packaging and advertising.
“Pricing power is always valuable, but it is all the more so when inflation is running strongly, and firms face margin pressure from rising input costs. Pricing power protects lofty profit margins, lofty profit margins support cash flow and cash flow funds dividends.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Financial year to September.
“The ugly dividend cut of 2020 is now fading from memory, as Imperial increases its dividend for the fifth time in a row and confirms plans, first flagged alongside October’s trading update, for a new £1.45 billion buyback – an increase on the programmes conducted in the fiscal years to September 2023, September 2024 and September 2025.
“Add together the dividend and the buyback and, based on analysts’ consensus forecasts for September 2026, Imperial is set to return the equivalent of nearly 11% of its stock market capitalisation to shareholders in cash in the coming year. This may catch the eye of income-oriented investors, especially if the Bank of England continues to slowly cut interest rates, even if those who run strict environmental, social and governance (ESG) screens will likely be less interested.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Financial year to September.
“Again, this is possible because of strong cash flow, which comfortably covers the dividend. It even – just – covered the dividend before 2020’s swingeing cut, but chief executive at the time Stefan Bomhard wisely took the view that long-term investment in the business was a better option than clinging to the millstone of an extremely high yield, for which the firm was getting no credit from investors anyway, judging by how the share price was sliding back then.
Source: Company accounts. Financial year to September.
“The long-term reduction in net debt has slowed down, and the buybacks will have a role to play there. Management clearly feels it has the correct funding structure, if it believes the increased dividends and enhanced buyback programme can be afforded comfortably.
Source: Company accounts. Financial year to September.
“As Imperial Brands embarks upon its second five-year plan, Mr Paravicini and new chief financial officer Murray McGowan are targeting high single digit percentage earnings per share growth on an annual basis, with free cash flow of £2 billion to £3 billion a year. The result is that the FTSE 100 index member plans to increase its dividend and buy back shares each year.
“The earnings multiple expansion of the past year shows that the first five-year programme finally started to win over investors, although the stock still trades at a discount on the basis of earnings and a premium on the basis of yield relative to the FTSE 100 overall, based on consensus analysts’ forecasts for next year.
“That at least partly reflects the modest growth trend in profits, regulatory threats, including in the UK, and the need to invest in next generation products (NGPs) such as blu, Pulze and iD. Overall NGP revenues rose by 14% in 2025, as the company seeks to strike the right balance between investing in this operation for growth and giving it the chance to generate profits on a sustainable basis over time.”
