Imperial Brands (IMBBY, Financial) is the third-largest tobacco company in the world. The stock yields 3.6% and has a grown its dividend at over 10% for several years. In today’s low interest rate environment, that yield is very attractive.
The company has 958.7 million shares and trades at a market cap of £38.4 billion ($50.6 billion). It only takes $1.32 to buy one pound. The dividend is 145.2 pence and the dividend yield is 3.6%. Earnings per share are £1.18 and the price-earnings ratio is 34.
Imperial is the No. 3 player in the world and holds 9.7% of the U.S. market. Altria (MO, Financial) and Reynolds (RAI, Financial) are Nos. 1 and 2 in the U.S. Its larger brands include Davidoff, Gauloises, Kool and Winston. Specialty brands include Drum loose tobacco, Cohiba cigars and blu e-cigarettes.
First half profit fell 66% from £853 million ($1.15 billion) to £290 million ($383 million) due to restructuring charges from the Reynolds deal. On an adjusted basis, which excludes one-time write-offs, profit rose to £1 billion ($1.32 billion) from £959 million ($1.265 billion). Revenues rose 5.6% to £12.81 billion ($16.9 billion), but cigarette sticks volume fell 3.1%.
Dividend growth has been phenomenal. This is the eighth year of 10% growth. Growth has been 12% compounded annually since 2008. Over £8 billion ($10.56 billion) has been paid in dividends since 2008.
The company’s top five markets are: U.S., Germany, U.K., Australia and Spain. As we all know, the U.S. has become very unfriendly towards smokers. Imperial has a foothold in many developing nations that do not have such an unfavorable view upon smokers, however. What is impressive is Imperial’s foray into e-cigarettes. Its Fontem Ventures is headquartered in Holland and is developing ways to meet new demands from smokers. Its e-vapor blu is part of Fontem.
Like most cigarette companies, Imperial carries quite a bit of debt. The assets side shows £561 million ($741 million) in cash, £3.951 billion ($5.2 billion) in inventories, and £2.524 billion ($3.33 billion) in accounts receivable. The liability side shows £2.591 billion ($3.42 billion) in loans, £7 billion ($9.24 billion) in accounts payable, and £11.7 billion ($15.44 billion) in debt. And also like most cigarette companies, Imperial’s saving grace is its big free cash flow: £2.554 billion ($3.37 billion) for 2015. Moody’s rates the debt BBB.
In pounds, the stock is at an all-time high: £40. The pink sheet that is traded in the U.S., IMBBY, is off about $5 from its all-time high, trading at $105. According to our custodian, Charles Schwab, the shares are due for a split. We own shares and are at a profit of between 20% and 30% including dividends. Tweedy Browne (Trades, Portfolio) is a major holder.
Earnings per share for fiscal year 2015 were £2.12. Based upon that number, the stock would trade at a P/E of 18.8, which is not too bad. It doesn’t seem that Imperial is a growth story but more of a dividend story. With interest rates close to 0%, the bar is not set that high. All Imperial has to do is keep paying that 3.6% yield. Smokers will probably keep smoking. Every time a municipality raises the minimum smoking age to 21, a new smoker takes up the bad habit in Iraq or Syria.
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