Imperial Brands (Imperial) is the fourth largest tobacco company in world operating in 120 countries. The company (IMB) has a comprehensive portfolio of cigarette, fine cut and other tobacco products. It also builds a next generation products (NGP) business. The business consists of reduced risk products and has three categories: vapour, heated tobacco and oral nicotine. By 2025 NGP should account for 20% of the total nicotine market.
Imperial has extended portfolio of 160 brands. The main brands are as follows:
Imperial has the following main markets and brands within each market:
The company has the following divisions:
- Europe region – 45% of total revenue in 2020. Priority markets are Germany (13% of Group net revenue in 2021), UK (9% of net revenue) and Spain (4% of net revenue).
- Americas region – 10.4% of revenue.
- Africa, Asia and Australasia region – 17.5% of revenue. Priority market is Australia with 4% of Group net revenue in 2021.
- Distribution – 29% of revenue. The company Logista distributes products to customers.
Over the year the company sold Premium Cigar business for EUR 1.225B (which have been used to reduce debt).
Dividend 
Revenue Profitability Financial Strength Investment Case
Dividend
| Dividend | Dividend Yield | Growth p.a. | PayOut Ratio |
| GBP 1.39 per share | 8.7% | 5Yrs: -2.2%; 1Yr: +0.7% | 46% |
| Dividend Policy
In 2020 dividend was cut by one third to generate more cash to reduce debt. The company declares progressive dividend policy with dividend growing annually. When a debt will be reduced to targeted level the company will return surplus capital to shareholders through a share buyback or/and special dividend. |
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| Sustainability
Dividend is well covered by free cash flow as the free cash flow of GBP 1.5B is higher than the amount paid in dividends, GBP 1.31B. Also relatively low payout ratio indicates that earnings safely exceed the amount paid in dividends. |
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| Future Growth Estimate
Despite a dividend cut in 2020, the dividend yield is high and attractive. As the company declares a progressive dividend policy, we could expect dividend growth in line with the expected EPS growth in the future, i.e. 3%. |
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Revenue
| Revenue | Revenue Growth | Revenue growth in 2020 | Company Outlook 2022 |
| GBP 32.8B
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5 Years Growth
+3.5% 1 Year Growth +0.7%
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By divisions:
Europe +2.6% Americas +0.6% Africa, Asia&Australasia -7.4% Distribution +3.5% |
In 2022 the net revenue growth to be at the same level as in 2021.
5-year compound annual growth rate of net revenue to be within 1-2% range.
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Profitability
| Profit | EPS Growth | Net Profit Margin | ROE | Company Outlook 2022 |
| EPS GBP 3
Net Profit GBP 2.83B
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5Y Growth
35% p. a. 1Y Growth 89% |
8.6%
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48%
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Adjusted operating profit to grow slightly less than a net revenue.
After been almost flat for 2022 it should grow on average at mid-single digit compound annual rate over the next three years. |
| Underlying profit
The Group’s adjusted operating profit is 4.8% higher on a constant currency basis impacted by a reduction in NGP losses and higher profit from Logista. At actual exchange rates operating profit is 15.2% higher. Reported EPS was up over 89% while adjusted EPS of GBP 2.46 was up 2.8% on constant currency basis. Reported EPS is impacted by the sale of the Premium Cigar division for GBP 1.225B. |
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| EPS growth assumption
In 2022 adjusted operating profit is expected to grow slightly less than a net revenue due to the expected increase in investments into 5 major markets and NGP pilots. According to 5 years strategy presented at the beginning of 2021, two years “strengthening” phase is followed by three years of accelerated returns and sustainable growth in shareholder value. We use adjusted EPS as a basis for our stock projection model as reported EPS is impacted by one-off sale of the Premium Cigar division. Based on the company outlook it could be assumed that adjusted EPS would grow at 3% per year on average. |
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Financial Strength
Company Capital Structure
In GBP B
| Year | 2019 | 2020 |
| Equity | 4.871 | 5.352 |
| Cash & cash equivalents | 1.626 | 1.287 |
| Debt incl. leasing | 11.951 | 10.073 |
| Net Debt, p.76 | 11.14 | 9.37 |
| Debt/Equity | 245% | 188% |
| Sustainability
Proceeds from the sale of Premium Cigar business for GBP 1.225B have been used to reduce debt. Also dividend cut implemented in 2020 and favorable exchange rates allowed to reduce debt by GBP 1.8B. Operating cash flow is 22% of the debt while interest payments are covered by operating profit at 6.5x. The company’s aim is to deleverage with a target leverage of net debt to EBITDA ratio within the range of 2 – 2.5x. At the end of the year it was 2.2x. |
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Investment Case
The estimate of future stock price and investment returns based on P/E ratio
| Assumptions of dividend and EPS growth over the next 5 years | ||
| Dividend could grow at 3% per year. So the total dividend income over the next 5 years would amount to GBP 7.6.
We could assume EPS growth of 3% p.a. Then EPS in 5 years will be GBP 2.85 per share. |
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| Projected stock price | ||
| Average P/E over the last 5 years (18.6) multiplied by EPS in 5 years = 18.6 x GBP 2.85 = GBP 53.04 | ||
| Future Returns Based on the Assumptions | ||
| Stock price upside potential 231% from the current price GBP 16.01
Overall return on investment* 279% Compound Annual Return on Investment 30.5% |
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*- Includes the expected dividend income over the next 5 years and dividends are not reinvested.
Imperial Brands has high dividend yield and quite low payout ratio. Its shares are valued well below our projected stock price and could provide investors with generous returns.
Disclosure:
I am long IMB.
Notes
Data source – the company’s financial reports and presentations. Source of pictures – the company website unless otherwise stated. Colored circles next to headings mean an author’s evaluation of the relevant performance criteria of the company: green means positive, yellow neutral and red negative evaluation. There are many ways to estimate the future stock price. We use only one of them, the one based on P/E ratio. All estimates made in the article are for the informational purposes only. No taxation, brokerage fees and other expenses related to investing are considered in the estimates. The estimates are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article only as a starting point for your own due diligence.