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Imperial Brands - Full-year in line, new 1.1bn buyback announced

Imperial Brands is on track to meet full-year guidance.

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Imperial Brands is on track to meet full-year guidance. Ignoring exchange rate movements, net revenue is expected to grow in the low single digits. Underlying operating profits are expected to have grown at the lower end of the mid-single digit range.

The group highlighted there has been growth across combustibles and next generation products (NGPs).

That's been driven by strong pricing and market share gains in its main markets, despite declines in the UK and Germany.

Imperial has announced a £1.1bn buyback for the new financial year, an increase of 10%. It also expects total shareholder payouts including dividends to exceed £2.4bn.

The shares rose 1.4% following the announcement.

View the latest Imperial Brands share price and how to deal

Our view

Imperial Brands has flexed its pricing power further this year. This is providing a boost to underlying operating profit, despite the negative impact of the suspension of its Russian business.

Overall, Imperial's gaining share in its core regions. However, the cigarette market's growth is unlikely to get much more exciting. That's why the entire industry's jostling for position in the up-and-coming Next Generation Products (NGPs) market, including products like heated tobacco and vape.

It's not been an easy start for Imperial. A more focused approach to the NGP portfolio is starting to bear fruit. But there's a long way to go before these products start to improve the bottom line. Another risk to the success of NGPs is the increasing attention they are receiving from regulators.

Net debt is sitting towards the upper end of the group's target of 2-2.5 times earnings but is expected to be closer to 2.0 times by the year end. That's given Imperial the financial headroom to prioritise shareholder payouts more than its only other UK listed peer. The shares are on a prospective yield of 9.7%. Whilst that can't be guaranteed, forecasted dividend payments for the current financial year are over 2.5 times covered by free cash flow. That also leaves enough to cover this year's proposed pay outs under the renewed share buy-back programme. That's an additional distribution equivalent to 7.6% of the company's market value.

As the smallest of the fifth listed tobacco giants, rumours often swirl that Imperial will get bought out by one of the bigger players. This isn't imminent though - and we think competition regulators would prove a major hurdle given the already high degree of market concentration.

The other important thing to consider with tobacco stocks is that many institutional investors can't, or won't, invest in the sector. This may mean that the shares are rated lower than the outlook for the industry warrants, but it's hard to see attitudes changing and valuations recovering.

It's promising to see some tangible results from the revitalised business plan, and investors are being rewarded for sticking with it. But Imperial still has plenty of work to catch up with rivals with much more evolved next-generation product ranges. That's reflected in a valuation sitting towards the bottom of the peer group. The investment case largely rests on the potential cash returns to shareholders, which are currently substantial. As ever though, yields are variable and not a reliable indicator of future income.

Imperial Brands key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 5th October 2023