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Share tip of the week

Each week, our analysts put the spotlight on a company from our list of recommended shares to buy. As always, it's recommended as a medium/long term investment (approximately 18 to 36 months). This week's share tip of the week is...

Imperial Brands (IMB)

  Company Sector Current price
(pence)
Change
today
  
Investment
objective

Risk
Our
view
  Imperial Brands (IMB) Tobacco  3649.50 c  -1.36%    Income Medium  Buy
 Analysis last updated on 19/05/17 at 3680p Recommended stop loss of 15%

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Company overview

Imperial Brands (formerly Imperial Tobacco) is an international tobacco company that manufactures, markets, and sells a range of cigarettes, e-cigarettes, tobaccos, rolling papers and cigars in 160 countries. Its brands include Davidoff, Gauloises, Gitanes and Golden Virginia.

Our view

Under/over valued?

Tobacco companies are seen as defensive investments because demand for their products does not vary significantly depending on the health of the economy. They generate a large amount of cash from their operations which usually enables them to pay good dividends. Consolidation in the sector has been a notable feature in recent years as growth has been harder to find and the focus has switched to cutting costs.

Interim results showed a 12% rise in revenue to £14.3bn and adjusted operating profit rose 6.3% to £1.7bn. Sales of cigarettes dropped 6% but the company raised its forecast for cost savings for the full year. The dividend was lifted 10%.

The shares trade on a 2018 PE of 12.8, which is below that of main peer British American Tobacco. The price to book ratio of 6.3 times is well below average and the prospective dividend yield of 5.1% is also better than BAT.

We are maintaining our ‘Buy' recommendation for medium risk income-seeking investors due to the very healthy dividend, excellent track record of dividend growth, the growing success of alternative products such as e-cigarettes and the possible revenue boost from improving US-Cuba trade relations.



Bullish points

• Imperial pays quarterly dividends and has a very impressive record of raising its dividend by an average of 10% for at least the last ten years, and growth is forecast to be well above inflation for at least the next three years.


• Improving US-Cuba relations could lead to a lifting of the trade embargo which would provide full access to the $7bn US cigar market. Through its Spanish subsidiary Altadis SA Imperial owns half of the Cuban state cigar company Habanos.


• Building its market shares in the US with leading brands giving it a strong position in the growing e-cigarette market.


• E-cigarettes are seen as having excellent growth prospects. Imperial's blu brand products are gaining traction in the UK and there are plans to boost sales in the US.


• Tobacco stocks are considered defensive compared to other sectors because sales are more consistent and generate a lot of cash for companies.


• Consolidation has been a feature of the sector in recent years with Japan Tobacco long rumoured to be interested in buying Imperial.


• Increasing cost savings and investing in the growth brands should boost sales growth.



Bearish points

• Iraq, Syria and Vietnam are challenging markets and likely to remain so for some time.


• Cigarette sales falling more rapidly than expected.


• Imperial has a larger exposure to developed markets, where cigarette consumption is falling, than some of its rivals. It needs to find sales growth in order to make dividends more sustainable over the long term.



Comment updated 19 May 2017

Author: Ian Forrest, Investment Research Analyst

The facts

Habanos is the only major Cuban company allowed to make and sell cigars in the country. Its very well known brands include Cohiba, Montecristo and Romeo y Julieta. The US has had a trade embargo with Cuba since 1962 but some analysts believe a significant proportion of Cuban cigar production is already consumed in the US illegally.

Below are the trailing 12 month results to the end of the final period versus the previous 12 month trailing period. As we are reporting rolling returns below, the data will be different to that which you see on other parts of our web site. Results are as follows:



Current

Basic Earnings per Share 66.1 pence

Dividend per Share 155.2 pence

Dividend Yield 4.1%

Revenue £14,099m

Operating Profit/(Loss) £2,229m

Debt to Equity 220.6%

Dividend Cover 0.43 times



Previous

Basic Earnings per Share 177.4 pence

Dividend per Share 141pence

Revenue £12,704m

Operating Profit/(Loss) £2,928m

Debt to Equity 213.6%



Change

Basic Earnings per Share -62.7%

Dividend per Share 10.1%

Revenue 11.0%

Operating Profit/(Loss) -23.9%

Debt to Equity 3.3%



Forecast Estimates 2018

Earnings per share 283.2 pence

P/E 12.8

Dividend yield 5.1%



Month(s) company is expected to go ex-dividend

January

May

August

October

View our previous recommendations

Please read our investment research policy to understand how our analysts reach their recommendations.



Valued using at least 15 minute delayed prices (where available)

Prices may fluctuate and appear inconsistent with the day's trading on or around the opening and closing of the stock market. This is due to the pre and post market auctions for certain LSE stocks, this is usually between 07:30 and 08:15 and from 16:30 until 17:00. The day's closing prices are indicated with a "c" against the price.