5 October 2023
If you are covering Imperial’s latest financial update, please find below a comment from Chris Beckett, head of equity research at Quilter Cheviot:
“With prohibition of cigarettes on the horizon in the UK, Imperial issued a reassuring financial update for investors ahead of their full year results. Clearly the impact of a cigarette ban will impact on Imperial’s bottom line in the very long-term but it will be a slow burn. For now focus needs to be on the dividend and share buyback, which was announced at £1.1bn for 2024 which will be beneficial to the share price. Investors do not need to overreact to the political risk just yet.
“The stock was weak yesterday on the back of Rishi Sunak's announcement of a rolling ban of the sale of cigarettes - applied to current 14-year-olds in 4 years’ time. Imperial is more exposed than its competitors to the UK (45% market share, 7% of group sales and 9-10% profits). As such, it will obviously have an impact and the group will need to think about how it navigates this ban and transition.
“Ultimately, prohibition has a very poor track record, and this would take a very long time to implement and have little immediate impact (far more young people vape than smoke). Perhaps the bigger concern is the exposure to disposable vapes, that the government also wants to crack down on. Competitors have better products in the refillable space, and thus Imperial will need to diversify the product range to not lose out as combustible cigarettes decline further.
“For the here and now, however, Imperial is a very cheap stock with cashflows available to fund a 10% dividend and an 8% buyback. Being a buyer of last resort when it comes to shares is important in an unloved sector. Imperial is not as strategically well placed as Philip Morris or BAT but this is reflected in the valuation. For investors looking for exposures, it remains a good option but others do look better placed.”
