Regular readers will know that I’m not a fan of Imperial Brands (LSE: IMB) and its Big Tobacco compatriots.
This wasn’t always the case. I used to own shares in the FTSE 100 tobacco titan but was encouraged to sell out for a variety of reasons. I was concerned about the low levels of investment Imperial Brands was making in so-called next generation products (NGPs) like e-cigarettes compared to its rivals, and the loss of millions of customers as it closed scores of local labels and doubled-down on a smaller number of core brands.
What really got to me though, was the rate of sales shrinkage in the overall cigarette market which not even some of the Imperial Brands’s titanic labels, such as West, Gauloises and JPS, can protect profits from. People are becoming more and more conscious of the health risks linked to such tobacco products and are stubbing out en masse, egged on by legislators across the globe through instruments like advertising and packaging constraints and public smoking bans.
Cigarettes sales stubbed out
Imperial Brands’ share price scaled fresh peaks in the months after I sold out in January 2016 but, ultimately, my decision to cast the business adrift has proven a wise one — the Footsie firm has lost 40% of its value since then.
And if latest trading numbers released this week are anything go by, details which shoved the company’s price to its cheapest since summer 2013, I’m not expecting Imperial Brands to break out of its tailspin any time soon.
In the six months to March, tobacco volumes sunk 6.9% year-on-year to 115.2bn sticks, a shockingly-poor result even if it was impacted by shipment timing troubles. Industry volumes fell by a much more modest 4.5%, and casts doubt over the idea that Imperial Brands’ labels are strong enough to keep volumes from sinking.
E-cigs running out of puff?
On the plus side, sales of NGPs e-cigs shot 245% higher in the first-half period to £115m. But even this was tempered with bad news as the Footsie firm advised of “a slowdown in the US where regulatory statements have tempered growth.”
Total sales of e-cigs et al in the North American territory dwarf those of all other world nations combined, and I’m expecting volumes to remain under pressure as US regulators debate the safety of technologies like the blu e-cig. With lawmakers in other regions also casting their eye over the health implications of these products things, too, the picture could get a whole lot worse for Imperial Brands.
Besides, it’s worth noting that while NGP sales growth in the first fiscal half was impressive, these cutting-edge technologies — products upon which the future of Big Tobacco seems to be hinging — account for less than 5% of Imperial Brands’s total net revenues right now.
While the company hiked the interim dividend 10%, I still think income hunters are best searching elsewhere. It has an uphill task to meet full-year guidance which it maintained this week, and things threaten to get a lot gorier as sales of its core products nosedive and its NGPs fail to ignite. I reckon it’s only a matter of time before the company’s progressive dividend policy comes crashing down.
I say forget Imperial Brands’s gigantic 9.5% forward yield and go shopping elsewhere.
