Imperial Brands PLC (IMBBY, Financial) has taken a hit with its resistance to join the new smokeless tobacco craze and the Food and Drug Administration wanting to reduce nicotine levels. This is a rare selloff for a blue-chip company with a dividend yield of 5%.
The company has 958.71 shares, the stock trades for 32.25 pounds ($41.29) and the market cap is 30.9 billion pounds. Earnings are 1.06 pounds and the price-earnings (P/E) ratio is 30. The trailing dividend is 1.60 pounds and the dividend yield is 5% (we are slightly rounding up).
According to the Financial Times, gross margins are 21.33%, net profit margins are 3.6% and operating margins are 7.31%. Not bad. Return on equity is 20.09%, which is outstanding. Return on investment is 5.14%.
Tobacco stocks have gotten beaten up with an announcement by the FDA there would be a cut in nicotine. The FDA notes that 90% of people in the U.S. started smoking before the age of 18. Around 480,000 deaths can be attributed to nicotine and it costs the U.S. $300 billion extra a year in health care. I asked Michael Felberbaum of the FDA if there was a stated nicotine metric the government agency was looking to achieve. He said there is no information at this time.
Morningstar’s analyst thinks the stock is down due to Imperial lagging its competitors in heated tobacco products. The analyst is bullish on the stock and thinks Imperial could get into the space pretty quickly. The product heats a cigarette so the smoker does not have to light it. The idea is less toxins will be inhaled. The FDA is looking into whether or not this product actually does what it claims.
Sales were 26.46 billion pounds in 2014, 25.3 billion pounds in 2015 and 27.6 billion pounds last year. You can see Imperial is a slow-growth company. Free cash flow was a ridiculous 3 billion pounds last year. The free cash flow yield would be about 10%. Approximately 1.386 billion pounds was paid in dividends. Those dividends get paid in good and bad times. For the first half of the year ending in March, sales were up 11.7% and the operating profit was down 10%.
Imperial’s tobacco products are sold under the names JPS, Parker & Simpson, Fine, West, L&B, News, Bastos, Winston, Davidoff, Kool and Gauloises. The company also sells e-vapor under the name blu, Drum rolling papers and even owns an interest in Cohiba cigars in Cuba. There is also a small logistics division. Management is looking at cutting the number of brands from 250 to 125. The top 20% of Imperial’s portfolio delivers 90% of the gross margin.
What is a little disconcerting is the amount of debt Imperial holds. As of the first half, there was 653 million pounds in cash and 2.7 billion pounds in receivables. This is to 14.45 billion pounds in debt and 7.6 billion pounds in payables. Yikes! That is a bit much.
There was in interesting quote from the Telegraph about tobacco stocks:
“The big threat of litigation has mostly passed, and cigarette companies are still managing to grow profits, have cut costs and have no hefty advertising budgets. As a result, cash flow is passed back to investors through dividends and share buy-backs. That type of stable income is hard to come by.”
What is bad for cigarette manufacturers is good for humanity. In 2000, about 25% of British people smoked. Now, it is down to about 16%. Smoking has declined in the U.S., too. Nasty old cigarettes. Great investments though. Director Simon Langelier bought 24,100 shares recently with the stock down in price. That is a plus.
According to Morningstar, Imperial receives 60% of sales in emerging markets but only 20% of Ebit. Imperial is also the largest player in Cuban tobacco and could do well if relations with Cuba improve.
With a 5% dividend, Imperial is close to bottoming. There is little chance the market will allow this blue-chip to yield 6%. We bought three years ago and are breakeven on the stock. Counting the dividend, we have made a little profit. Imperial is a buy at these prices. Interest rates are low and the stock is as close to resilient as you can get. When all of this bad news passes, chances are the stock will go back up.
Disclosure: We own shares.
