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Imperial Brands - steady growth in full year sales and profits

Ignoring the effects of exchange rates, underlying net revenue was up 1.5%, to £7.8bn.

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Ignoring the effects of exchange rates, underlying net revenue was up 1.5%, to £7.8bn. Tobacco volumes fell 4.7% but this was offset by a 6.0% revenue bump related to price increases and market mix.

Sales from next generation products, such as heated tobacco, grew 11% but only contributed 0.2% to total revenue growth. That's because it's still a very small part of Imperial's product range.

Underlying operating profit was up 1.8% to £3.7bn. For now, Imperial expects this annual growth rate to remain in low single digits. As it moves through the last three years of its five-year plan, it's targeting an acceleration into the mid-single digit range. Imperial also acknowledges the pressure on consumer spending and high inflation.

Free cash flow was up 68.1% to £2.6bn. Meanwhile net debt was down from £9.4bn to £8.5bn.

Total dividends for the year are up 1.5% to 141.17p per share. A previously announced £1bn share buyback is ongoing.

The shares were unmoved following the announcement.

View the latest Imperial Brands share price and how to deal

Our view

As the second year of Imperial Brands' refreshed strategy ends, it's refreshing to see signs of real progress. For the first time in several years, the group's improved its market share. That's all testament to the narrowed in focus on core markets and a more disciplined approach to capital allocation.

There's more good news for investors, with net debt comfortably within the group's target of 2-2.5 times earnings a £1bn buyback is to be completed in the new financial year with commitment from management to extend buybacks into the future. That's in addition to the existing dividend policy. Remember, no returns are guaranteed.

That makes profit growth the main area of focus and that's something that's been hard to come by. Price increases in traditional tobacco products have been able to prop up sales despite declining volumes. For now, strong pricing's enough to give management confidence they can grow underlying operating profit in the mid-single single range on a compound basis over the next few years.

But whilst that'll keep cash flowing, growth in the cigarettes market's unlikely to get much more exciting. Imperial aren't alone in that, though, 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 from Imperial. Management responded to its NGPs' lukewarm reception by exiting unprofitable markets, homing in on those it felt had more potential. It's early doors, but trials look promising and broader rollout for vape and heated tobacco products is underway. Investment in these new products will weigh on performance in the short term, and the NGP division is loss making. It's the right move if a narrowed focus helps the group build out successful cigarette-alternatives, but there's a long way to go before these products start to make a meaningful positive impact on performance.

As the smallest of the four 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 really warrants, but it's hard to see attitudes changing and valuations recovering. An investment case should therefore be generally built around the dividend yield, which is currently substantial, and the NGP prospects.

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 do to catch up with rivals who have much more evolved next generation product ranges. That's reflected in a valuation sitting below it's 10 year average and there are plenty of ifs and buts for now.

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: 15th November 2022