Yahoo Finance Ethical investors may ignore it but this tobacco firm offers a 7pc yield
Smoking is not everyone’s idea of a good way to relax, but the globe seems no nearer to kicking its nicotine habit than it does its reliance on oil and gas. Whether we like it or not, this provides opportunity for those investors who are prepared to be pragmatic and trade in the markets (and the world) they have, rather than the one they want.
To put none too fine a point on it, Imperial Brands still looks cheap as if offers a yield north of 7pc and comes at a price‑to‑earnings ratio of barely nine.
Ethical investors will just walk on by regardless of such numbers, but harder‑nosed portfolio builders may well be intrigued by the upbeat tone of last week’s trading statement from chief executive Stefan Bomhard. Yes, global cigarette volumes will remain under pressure over the long term. But Imperial Brands believes it is taking market share and, most powerfully from an investment perspective, the FTSE 100 company is successfully pushing through price increases.
Such rises are supporting revenues and profits, which in turn are supporting cash flow. That cash flow funds not just the £1.3bn annual dividend payment, but also a newly launched £1bn share buyback programme that will run to the end of September next year.
This column has mixed views on buybacks, as set out here on April 19, but Imperial Brands’ lowly valuation suggests the maths make more sense here than in many cases. Moreover, the ability, and confidence, to return more cash to shareholders represents a huge step-change from the profit warnings and dividend cut of just two years ago.
Readers, alas, may not get the chance to participate in the buyback, but the good news is that their percentage share of the company’s equity – and therefore their percentage claim on its cash flow and dividends – will rise.
The turnaround at Imperial Brands is heating up. Hold.
Questor says: hold
Tickers: IMB
Share prices at close: £20.06
Market outlook for the final quarter of the year
“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”
So wrote Mark Twain and he did so from bitter experience. Today’s investors could have been forgiven for fearing the worst too, after carnage in the gilt market, a proliferation of corporate profit warnings on both sides of the Atlantic and lurid stories about Credit Suisse’s financial health.
But a new narrative is developing as markets wait for, and try to anticipate, a pause and then a change in central bank monetary policy.
Markets shrugged off the pressure on Credit Suisse and latched instead onto a lower‑than‑expected increase in interest rates from the Reserve Bank of Australia, a drop in US job vacancies and weak new orders in the latest American purchasing managers’ index for manufacturing as early signs that the breakneck speed of monetary policy tightening may be about to slow. That prompted an upward pop in share prices and other “risk assets” around the world.
Federal Reserve officials moved to pour cold water on talk of a pause in rate rises – and, ironically, the higher stock markets and risk assets go, the bolder central bankers may feel they can be when it comes to staying the course with interest rate increases and “quantitative tightening” – undoing QE.
Jobs figures also seem strong enough to warrant further tightening of policy, but these numbers are “lagging indicators”. By the time the official data shows increasing unemployment the damage will already be done, to the economy, markets or both.
Central bank intervention in not just gilts but the currencies of China, Japan and Thailand suggests that stresses and strains are starting to show. If the authorities do slow, pause and finally reverse rate rises they would potentially be leaving us to take our chances with inflation.
That in turn could prompt a dash to “hard” assets, or at least paper claims on them through shareholdings. But the intervening period is likely to be a volatile one and investors may need to proceed with caution before they see the next leg up in share prices, especially if central banks show more backbone than markets currently expect.
Russ Mould is investment director at AJ Bell, the stockbroker
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