Getting latest data loading
Home / Blog / blog / Company Focus || Will Tobacco Stocks Burn Out? || 3-4-2020

This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.

Company Focus || Will Tobacco Stocks Burn Out? || 3-4-2020

Tobacco firm, Imperial Brands, saw its share price ignite, up 12 per cent, after it announced that the coronavirus outbreak is having no material impact on its operations.

It says it is increasing stocks of many of its products and that it has secured a new 3.5 billion EUR credit facility although it does not need to use it yet.

It was particularly good news for current investors as the tobacco brand paid out on a £683 million dividend, in a climate when may other companies are suspending or postponing theirs.

Obviously, some investors will be deterred by tobacco shares, but with Imperial’s share price now standing at 1,569.50p, is it a good bet for a long-term yield?

Clearly there is still a market for tobacco, although global volumes have been falling as the population becomes more health conscious. An unfaltering demand for its product through the current pandemic has been a big pull for Imperial Brands, which manufactures JPS, Galouise and Winston cigarettes amongst others.

The other big attraction for investors is the tobacco brand’s high dividend yield – at 15.3 per cent, it is hard to beat. While its dividend will no longer be increasing at ten per cent per year, Imperial has recently committed to a growing dividend with surplus cash returned through share buybacks which is an attractive proposition.

It is worth noting though that shares in the tobacco brand were down 28.7 per cent since the start of January thanks to pressure from slower than expected e-cigarette growth – the brand manufactures Blu e-cigarettes – and a regulatory crackdown in the US on vaping. Next Generation Products, such as vapes, are a big path for growth for tobacco companies, but recent health scares in America have led to aggressive action from the US Food and Drug Administration which could have a detrimental effect on the burgeoning market.

Some analysts have pointed out that Imperial carries a high net debt burden with three times net debt to underlying cash profits although Hargreaves Lansdowne described this as “not prohibitive for a company with such dependable earnings.” In July, the firm’s current CEO, Alison Cooper will be replaced with Stefan Bomhard, and many expect that one of his first tasks will be trimming down the company’s debt.

The tobacco brand also reassured investors with news of its contingency plans, saying that it is prioritising manufacture of major product lines to build stockpiles and that its Logista distribution service which delivers to retailers in regions of France, Italy and Spain has stepped up its distribution service.

Opinions are divided on whether Imperial is a good long-term buy – analysts at Citi, for example praised the firm’s resilience and pointed out that if sales do slow down, it can always cut back spending on next generation products or fall back on its credit facility. Others, though, are more cynical about Imperials long-term outlook, pointing to its downwards trend before the current crisis, and raising concerns that coronavirus could persuade even more smokers to quit.

« Back to Category

This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.

Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance.

Comments are closed.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.