Imperial cuts dividends to pay off debt

Imperial marks (IMB) cut its half-yearly dividend by a third to 41.7 pence, in a bid to ease its £ 14bn debt load. The tobacco giant said the uncertainties caused by the coronavirus pandemic and the regulatory scrutiny of its industry “reinforce the importance of a strong balance sheet to underscore the defensive characteristics of our business.”

The reduced payout implies an annual dividend of 137.7p for 2020. Imperial intends to continue a phased policy from this revised level. He stressed that any savings would be used to bring speed down to its target range of 2-2.5 times by the end of 2022. And, arguably, the group has already made progress on that ambition; At the end of April, it unveiled the sale of its high-end cigar business for £ 1.1 billion gross of tax.

But Imperial is facing extreme pressure. In the six months leading up to March, its Next Generation Product (NGP) portfolio suffered a 44% contraction in net sales to £ 83million, reflecting declining supply chain inventories and issues America’s health concerns regarding “vaping” products – something made worse by the US Food and Drug Administration (FDA) decision to ban flavored “pods”. Imperial noted that these announcements spawned “contagion” in European markets – unfortunate terminology.

By comparison, net tobacco revenues were flat at £ 3.5bn. But while Covid-19 has had minimal impact on trade so far, Imperial expects this to be more apparent in the second half of the year – exacerbated by pressures on the travel industry, not to mention possible changes in consumption patterns, including downtrading. This health crisis has, after all, triggered an economic recession.

Lower in the income statement, adjusted operating profit fell 7.7% to £ 1.5 billion, tempered by lower NGP sales, depreciation charges and higher provisions for slow moving stocks.

Panmure Gordon expects adjusted EPS of 259p for 2020, up from 273p in 2019. Imperial’s dividend cut came earlier than expected by the broker, although it remains bullish – arguing that the market can now go Focus on an implied return of 8.3%, “which will be well hedged.” That return moved closer to 9% as a result of these results, with the market reacting with disappointment.

ORDER PRICE: 1 512p MARKET VALUE: £ 14.3 billion
TO TOUCH: 1 511-1 513p UP TO 12 MONTHS: 2,256p LOW: 1,258p
NET ASSET VALUE: 451p * NET DEBT **: £ 14.1 billion **
Semester on March 31 Turnover (£ bn) Profit before tax (£ bn) Earnings per share (p) Dividend per share (p) ***
2019 14.4 1.02 71.2 62.56
2020 14.7 0.79 55.6 41.70
% cash +2 -23 -22 -33
Ex-div: May 28; 20 August
Payment: June 30th; Sep 30
* Includes intangible assets of £ 18.2 million, or a share of 1,928 pa
** Includes lease debt of £ 302 million
*** Dividend to be paid in two installments of 20.85p

Carol M. Barragan

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