Imperial Brands is a consumer goods company which manufactures, markets and distributes nicotine products including well-established brands such as Davidoff, West and Winston. Since its demerger from Hanson in 1996, Imperial Brands has been a great ‘compounder’, delivering impressive double digit annualised total returns to shareholders, through a combination of an attractive dividend income stream and strong, dependable dividend growth. That growth has been driven organically, augmented by cost rationalisation and a series of value-enhancing strategic acquisitions, which have transformed the company’s regional profile.
With a high market share in the UK, Imperial Brands is still seen by many as a local player in a globalised industry. In reality, the majority of its revenues these days are derived from overseas but, in an industry which is arguably approaching the final stages of consolidation, Imperial Brands is one of very few potential bid targets.
Investment case summary
The tobacco industry offers many attractive investment characteristics such as sustainably high profit margins, substantial barriers to entry, strong cash generation and considerable pricing power. However, the market has been reluctant to view it as a growth industry. The Woodford funds have maintained a large exposure to tobacco businesses for many years, believing them to be structurally undervalued – at times profoundly so. More recently, however, the wider sector has enjoyed a material re-rating to valuation territory which more appropriately reflects its attractive attributes. Other tobacco stocks have subsequently been sold from the portfolios but Imperial Brands remains, representing the last bastion of outstanding value in the sector.
Recent market conditions have not been favourable for Imperial Brands, which has been a deeply unpopular stock. Nevertheless, from a fundamental perspective, Imperial Brands continues to be a business which should deliver attractive and sustainable long-term dividend growth, as it has done throughout its history as a quoted, independent business. With the share price revisiting valuation territory that we haven’t seen in many years, Imperial Brands simply looks like it is trading at the wrong price.
|Income Focus Fund||8.43%|
|Equity Income Fund||8.71%|
As at 31 August 2018
This morning’s trading update from Imperial Brands confirms that the business is on track to meet expectations for the full year. The company’s growth brands continue to gain market share, resulting in a robust volume performance. Imperial Brands also announced it is stepping up its activity in next generation products (NGPs), with multiple launches lined up in the next few months.
Cash generation remains strong, and the company has reiterated its commitment to 10% dividend growth. Overall, the update is as expected and it suggests that the business is in far better shape than its share price and valuation would suggest.
7 February 2018
All of them (tobacco businesses) share some of the same characteristics – the demand for the product is very predictable their business is capital unintensive and generates lots of cash ...the cash returns are very attractive the dividends are reliable and there is one more upside that comes from consolidation.14 July 2014