- Tobacco giant’s shares had reached their highest mark since 2017 in February
- First-half update disappoints on market share and currency movements
- Downgrades to earnings estimates likely to be smaller than the share price drop
- Combination of dividends and buybacks means the stock still offers a potent total cash yield
“There is little shortage of things to worry about in the news at the moment, but the days when frazzled consumers reached for a cigarette to calm their nerves feel like a long time ago and Imperial Brands must work hard to generate the cash flow that funds its dividends and share buybacks,” says AJ Bell investment director Russ Mould.
“Chief executive Lukas Paravicini knows this only too well, as he drives the FTSE 100 firm’s second five-year plan, but analysts seem disappointed with the first-half trading update, thanks to concerns over market share loss and currency movements, even if Imperial Brands is sticking to its profit guidance for the full year to September.
Source: LSEG Refinitiv data
“Imperial Brands had hit its highest level since 2017 last month, so the absence of any additional good news may have prompted some investors to book a profit. The global cigarette market continues to shrink, and Imperial must combat this with the combination of market share gains in its key geographies, price increases, higher sales volumes for next generation products (NGPs) and cost efficiencies.
“It has done so with great success this decade, as evidenced by how sales have grown despite falling stick volumes.
Source: Company accounts. Financial year to September.
“Profits and profit margins have held up well, too, even as regulatory pressure and health campaigns have continued to weigh on volumes.
Source: Company accounts, Marketscreener, consensus analysts' estimates. Financial year to September.
“The latest update reassures that the volume decline remains relatively gentle and prices remain robust. Imperial’s 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.
“However, investors are taking fright at management’s admission regarding some loss of market share across its five key target geographies of Australia, Germany, Spain, the UK, and USA, and also a slightly slower than expected start to the year for sales of NGPs. The first half’s single-digit percentage rate of growth means that this segment must show an acceleration in the six months to September if Imperial is to live up to its prior guidance of a double-digit percentage rate of sales growth across the whole financial year.
Source: Company accounts, Marketscreener, consensus analysts' estimates. Financial year to September.
“As a further complication, foreign currency movements are now expected to detract from first-half and full-year earnings per share, not enhance them.
“Analysts may well therefore look to shave earnings forecasts by a percentage point or two, but the shares are falling by more than that, so some investors might be inclined to view this as an opportunity to reassess the stock, especially if the war in the Middle East drags on. If global growth sags in this scenario, then shares in defensive, less economically sensitive companies and industries may come to the fore.
“Imperial Brands still has pricing power. This is always a valuable facet, 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.
“Imperial increased its dividend for the fifth year in a row in 2025, when it also launched a new share buyback worth £1.45 billion, to follow three prior, smaller programmes.
“Add together the dividend and the buyback and based on analysts’ consensus forecasts for September 2026, Imperial is set to return the equivalent of more than 11% of its stock market capitalisation to shareholders in cash in the coming year. This may catch the eye of income-oriented investors, even if those who run strict environmental, social and governance (ESG) screens will 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 then 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. Financial year to September.
