2019’s been another year of progress for the FTSE 100 and Britain’s premier share index is up 7% since trading started on January 2. It’s not been a year to celebrate for all of the bourse’s blue-chips however. I recently explained why 2019 has proved a year to forget for long-running sinker Centrica and discussed why the energy giant could keep on sinking in 2020. But it’s not the only Footsie stock I fear for in the upcoming year.
Up in smoke
Like Centrica, Imperial Brands (LSE: IMB) has also been prone to bouts of extreme weakness and in the year to date, its share price is down 28%. In times gone by, uncertain political and economic situations like these would bring safe-haven stocks like this to the fore. The addictive nature of their products provide far superior earnings visibility than much of the market.
This is no longer the case, a reflection of years of legislative action to curb the use of cigarettes, cigars and other combustible tobacco products all over the globe. In Imperial Brands’ key US market, for example, the rate of cigarette smoking has now fallen to an all-time low of 13.7%, down around two-thirds over the past 50 years.
However, the steady decline in the sale of tobacco sales hasn’t been the biggest problem for Imperial Brands and its peers of late. Rather, disappointing sales of their so-called next generation products (NGPs) — the great hope for Big Tobacco as demand for their traditional goods go down the drain — has been the major fear for these firms in 2019.
This was apparent in Imperial Brands’ results for the fiscal year ended September 2019. Because of what it described as “tough trading” for its NGPs, like the blu e-cigaratte, results came in way short of expectations, with operating profit falling around 9% year-on-year to £2.2bn.
Sales of its next-gen products still rose a healthy 50% in the last financial period, although the signs are growing that vapers are beginning to fall out of love with the technologies amid growing health concerns. These are worries deterring crowds of potential new users from taking up these products.
These concerns have mainly taken root in the US where there are more than 2,000 cases of lung injury apparently linked to e-cigarettes and similar products.
But with cases spreading across the world, from the UK and China to Canada and India, and legislators taking action to restrict the use, sale and marketing of these products with increased vigour, 2020 looks like it could be another year of trouble for Imperial Brands and its competitors.
There’s clearly still a lot to like about Imperial Brands on paper. City expectations of a 1% earnings rise in fiscal 2021 leaves it trading on a rock-bottom P/E ratio of 6.3 times for fiscal 2020. It also carries a colossal 12.1% dividend yield too.
Such outrageous valuations suggest some big forecast downgrades could be around the corner though, and reflect growing fears of a meaty dividend cut. So forget about buying this FTSE 100 share, I say, and use your hard-earned cash to invest elsewhere.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019