Why You Should Invest In Imperial Brands
Imperial Brands is perfect for your stocks and shares ISA, here are some reasons why!
For those who are familiar with my work on Seeking Alpha, I’ve published articles on Imperial Brands (LSE:IMB) in the past, going all the way back to 2014! My last article was back in January 2018 and the annual report is not due for release until the 6th November. So unfortunately we only have the interim report and recent market news to go on for the next 2 months.
The company is among the “Big 4” in the Tobacco world, the other 3 being none other than Philip Morris International (NYSE:PM), British American Tobacco (LSE:BATS), and Altria Group (NYSE:MO).
The Push Into Next Generation Products
The myBlu e-cigarette brand continues to expand as it’s now in 6 countries, and the company expects this to increase to 10 by the end of 2018. Distribution is also growing in traditional retail, vape stores and online. They’ve also recently launched the myBlu Intense range, which include nicotine salts from tobacco plants for a stronger delivery.
Investing In Medical Cannabis
In July 2018 Imperial Brands invested in a biotech company called Oxford Cannabinoid Technologies and they research, develop and licence cannabinoid-based compounds and therapies.
This is a smart step by the company to pursue a product that has been gaining popularity and support for legislation, making it legal to use for either recreational or medicinal purposes.
This was also highly anticipated as the company recruited cannabis expert, Simon Langelier, to their board in June 2017.
Watch this Bloomberg Interview below for more details!
Recent Financial Results & Valuation
For the interim results posted on the 9th May, revenue has was relatively flat as revenue declined by 0.13% compared to the same period last year. Operating income also took a small hit from £902 million down to £833 for a 7.65% decline.
If we look at the cash flow from operations though, we see a huge increase from £563 million to £837, the 48.66% increase is mainly due to changes in working capital.
The company is also actively divesting its tobacco brands (they had over 200 at one point!) that simply no longer meet profitability or growth targets. Logista has also been cut by 50%, raising a total of £235 million that will be used to reduce debt.
|Total Revenue (M)||£28,269||£26,460||£25,289||£27,634||£30,247|
|Free Cash Flow Per Share||£2.13||£2.34||-£2.15||£3.13||£2.97|
|Dividend Per Share||£1.16||£1.28||£1.41||£1.55||£1.71|
|Free Cash Flow Payout Ratio||54.46%||54.70%||-65.58%||49.52%||57.58%|
The table above represents the annual figures for Imperial Brands, 2015 is a blip due to the company acquiring several USA brands from Reynolds American & Lorillard before their merger and takeover by British American Tobacco.
Looking at the company’s free cash flow per share of £2.97, the current share price of £28 is incredibly cheap considering its growth aspects, and its comfortably below my 10x price of £29.70.
Strong Dividend Growth & Current High Yield
Imperial Brands dividend policy remains unchanged, as they repeated their goal is to increase the dividend by at least 10% over the medium-term. If we take the annual dividend of £1.70 for 2018, its safe to assume the dividend will be around £1.88 this year.
With a current share price of £28, that represents a dividend yield of 6.71%! In 5 years our yield on cost will have grown to 10.80% if the dividend continues to grow.
This company is currently offering you total returns of 17.38% from an income perspective if you buy stock today and reinvest the dividends! For example if you had enough stock that your annual dividend income was £1,000, you reinvest that into more shares at a dividend yield of 6.71%, increasing your annual dividend income by £67.10. Imperial Brands then gives you the great news by announcing an increase of 10%! You’ve now grown from £1,067.10 to £1173.81.
This is the power of dividend growth investing and finding companies at attractive valuations to get you market beating returns!