Imperial Targets Alt Market Expansion

Posted 10th July 2019 by Dave Cross
Imperial Brands has been hit by the rapid growth of JUUL Labs. The one time generous dividend payer has announced that it plans to scrap its 10% dividend target. Although the 2019 dividend will remain unchanged, it plans a revised progressive dividend growth policy thereafter targeting expansion with its Next Generation Products (NGP).

Imperial is one of the world’s biggest tobacco companies, servicing 160 markets and employing in excess of 30,000 people. The other side to Imperial is that its share price has taken a battering thanks to the vape boom – tumbling over 50% from a record high three years ago.

The impact of vaping, and pod systems like JUUL in particular, has prompted Imperial to shift its position to one that will eventually turn it away from its traditional tobacco base. The company says it is redirecting funds to manage:

  • Continued investment in organic growth opportunities in tobacco and NGP, and
  • Investment in targeted M&A opportunities to build on the capabilities and technologies of our NGP portfolio and in other growth adjacencies

“The revised dividend policy will be progressive, growing annually from the current level, taking into account underlying business performance. This new policy recognises the Company’s continued strong cash generation and the importance of growing dividends for shareholders, while providing greater flexibility in capital allocation.”

The announcement of a £200m share buyback had an immediate impact and raised share value by 2.5%.

Writing for investment website The Motley Fool, Kevin Godbold says: “The market for traditional smoking products may be in long-term decline if you consider the combined global picture, but there’s a strong market for new-generation smoking substitutes. These days, every street corner seems to feature a cluster of people puffing fruity vapour, for example. Who would have foreseen such a take-up of that habit just 15 years ago?”

“Given how perky the underlying businesses look, my view is that valuations could have over-shot to the downside. That’s why I suspect shares in Imperial Brands … could fly higher.”

Market analyst Alicia Forry commented: “This is something investors have been asking for, to abandon a restrictive dividend policy.”

Imperial hasn’t had the resources that Philip Morris or British American Tobacco has had to invest in the development of alternative nicotine products. Redirecting dividend payments will boost their ability to compete in the vape market. In addition, it is set to hive off its premium cigar brand business – which could add around £1.5 billion to its war chest.

It has not commented whether its NGP expansion will focus on in-house product development or the acquisition of existing vape brands.

Resources:

  • Imperial Brands Announces Revised Capital Allocation and Dividend Policy – [link]
 Dave Cross
Article by Dave Cross
Freelance writer, physicist, karateka, dog walker