- Shares hit a new five-year high
- Strong cash flow funds increased dividend and larger buyback scheme
- Forward dividend yield is around 6.6%, with buybacks on top
- Firm enters final year of turnaround plan as it seeks to accelerate earnings growth
“Imperial Brands is entering the fifth and final year of chief executive Stefan Bomhard’s turnaround plan and he may therefore take some satisfaction from how the shares are hitting fresh five-year highs upon publication of the FTSE 100 member’s full-year results,” says AJ Bell investment director Russ Mould. “Higher prices and product mix are offsetting the relentless decline in cigarette volumes, cash flow is strong and the dividend is up, while the company is about to launch a well-trailered share buyback scheme for a third consecutive year of £1 billion-plus cash returns via this mechanism.
“A year ago, Imperial Brands’ dividend yield was higher than its price/earnings ratio to show investors’ ongoing concerns about the company’s business model and the long-term future of smoking, given how regulatory pressure and health campaigns continue to weigh on volumes.
“The shares now trade on roughly 10 times forward earnings with a yield of 6.6%, based on consensus analysts’ forecasts for the year to September 2025, 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
“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, Vuma, consensus analysts' estimates
“The dividend cut of 2020 is now fading from memory, as Imperial increases its dividend for the fourth time in a row and confirms plans, first flagged alongside October’s trading update, for a new £1.25 billion buyback – an increase on the £1 billion programmes conducted in the fiscal years to September 2023 and September 2024.
“Add the two together and, based on analysts’ consensus forecasts of an increase in the dividend for September 2025, Imperial is set to return the equivalent of 13% of its market cap to shareholders in cash in the coming year, which may catch the eye of income-oriented investors, if not those who run strict environmental, social and governance (ESG) screens.
Source: Company accounts, Marketscreener, Vuma, consensus analysts' estimates
“Again, this is possible because of strong cash flow, which comfortably covers the dividend. It even – just – covered the dividend before the swingeing cut, but chief executive 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
“The long-term reduction in net debt has slowed down, thanks to increased inventory, higher capex and – above all – the buybacks. Had it not been for that combination, debt would have gone down even further, so management clearly feels it has the correct funding structure, even if the group’s financing costs rose slightly thanks to higher interest rates in the past year.
Source: Company accounts
“As it enters the fifth and final year of chief executive Mr Bomhard’s five-year turnaround plan, Imperial Brands expects to generate high-single-digit percentage growth in earnings per share, helped by the buybacks, on the back of a low-single-digit percentage advance in sales and a mid-single-digit percentage increase in operating profit.
“The earnings multiple expansion of the past year shows that this plan is gaining more credence with investors, as Imperial Brands delivers on its medium-term targets and makes a generous cash return, 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 a quarter in 2024 and that did at least help to reduce the loss from this revenue stream as the company seeks to get the right balance between growing this operation and giving it the chance to generate profits on a sustainable basis over time.”
