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Imperial Brands - steady profit growth expected to continue

Imperial Brands has reported full year net revenue growth of 1.4%, to £8bn, ignoring the effect of exchange rates.

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Imperial Brands has reported full year net revenue growth of 1.4%, to £8bn, ignoring the effect of exchange rates. This also excludes the impact from Imperial's exit from Russia.

Growth was entirely driven by higher prices, which rose 11%. This offset a 7.1% decline in tobacco volumes, and a shift in the United States towards lower value items. Next generation products saw net revenue growth of 26.4%, driven by a 40.4% uplift in Europe.

Improved revenue together with cost control, helped underlying operating profit grow 3.9% to £3.9bn.

Imperial generated free cash flow of £2.4bn, compared to £2.6bn last year. Net debt was flat at £8.4bn.

For the new financial year, the group expects revenue growth in the low single digits, and operating profit growth in the mid-single digit range. Performance will be weighted towards the second half of the year.

The dividend was raised 4% to 146.82p per share.

The shares were flat following the announcement.

View the latest Imperial Brands share price and how to deal

Our view

Imperial Brand's generates most of its revenue from traditional cigarette labels such as Lambert & Butler, and John Player Special. Increasing regulatory pressure and changing consumer preferences towards healthier lifestyles, means this isn't an easy place to be. Industry volumes continuing to head downwards.

But the nature of selling an addictive product means Imperial's been able to put through big price increases to offset lower volumes. Combined with impressive cost savings, that means profits are holding up. 

More of the same should be achievable this financial year as it targets further market share gains in its core regions. But tobacco companies can't fight the tide forever. If volume declines continue at this pace, growth in combustible sales won't be sustainable for long.

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 vapes.

It's not been an easy start for Imperial. A more focused approach to the NGP portfolio is starting to bear fruit. But these products are still a relatively small part of the picture. It's too early to say if they can be a viable replacement for the shrinking tobacco business. First we will need to see several years of high double digit growth and demonstratable evidence of sustainable profit margins. Another risk to the success of NGPs is the increasing attention they are receiving from regulators.

At under 2.0 times underlying cash profits net debt is at around the lower end of the target range. 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 8.6%. Forecasted dividend payments for the current financial year are nearly 2 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. Please remember no shareholder returns are guaranteed.

Sitting just outside the big 5, 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.

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: 14th November 2023