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The behaviour of the post-coronavirus consumer is still to be determined. When socialising eventually permits, will there be a prolonged drinking and eating-out binge to celebrate? Or will this health crisis of vast proportions turn us into a nation of fitness and well-being converts?
At about £10 for a pack of 20 cigarettes, some people regard smoking as an affordable treat when they have been deprived of so much else during lockdown. And yet if ever there was a time to kick the habit, it is when a virus that exploits weak respiratory systems has swept the globe.
All the evidence so far suggests that smokers have carried on regardless. The fact that your home is one of the few places where a ban has yet to be imposed has actually been good for business.
Citing a rise in cigarette consumption in America in the past two weeks, analysts at Morgan Stanley have pencilled in volume declines of 5pc this year in that market, compared with a slightly deeper 5.5pc decline last year.
Despite high levels of duty and tough rules around promotion and packaging, Imperial Brands – home to JPS, Gauloises and Lambert & Butler – is a past master at eking out more from less, usually by lifting prices. Last year tobacco profits rose by 1.8pc despite volume declines of 4.4pc. The question is: for how much longer can this continue?
Imps has had trouble with trading, but none so far to do with Covid-19 affecting supply or demand. At the end of March, when it disclosed to the market a new £3bn revolving credit facility that gives it committed bank financing until March 2023, Imps said the virus had had no material impact on group performance.
That was a relief for investors who had been disappointed by progress with “next-generation” products, which had been stymied by regulatory moves such as the US Food & Drug Administration’s ban on flavoured e-cigarettes. Sales of brands such as blu and Pulze are still a rounding error in the context of the group.
Finding growth drivers would be less of a problem if Imps didn’t have so much debt. Late last month the group announced that it was selling its cigar business – including its interests in the brands Cohiba, Montecristo and Romeo y Julieta – in two transactions that will net it £958m, which will be used to reduce borrowings.
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There are more disposals to come, perhaps some of its lesser brands and probably its remaining stake in the listed European distribution business, Logista, which could net another £1bn or so.
Given the grim news from Royal Dutch Shell and BT in recent weeks, investors with no ethical concerns will be most interested in what Imps does with its dividend.
After an 11-year run, last summer the group abandoned its long-standing policy of raising the payout by 10pc a year, promising to raise it progressively instead and taking into account business performance. But while it revised its policy, the company did not take the opportunity to reduce the dividend, which costs around £2bn a year.
Now that the shares are yielding almost 13pc, the market is telling us that something’s got to give. But it would be odd if the company made the call to cut on Tuesday, when interim figures are due, because divisional directors Dominic Brisby and Joerg Biebernick are merely keeping the seat warm until July 1 when the new chief executive, Stefan Bomhard, arrives from Inchcape.
His story at the car distributor was one of sound capital allocation, so there is much to get his teeth into at Imps.
For instance, if the company had followed the lead of British American Tobacco, its bigger London-listed rival, which pays out 65pc of earnings, last year’s dividend might have been around 15pc lower.
But even if the payout is cut or held, it still makes for a juicy return for investors in search of income. The shares have trickled down since this column last wrote on Imps’ prospects three months ago. Company followers at RBC, the bank, forecast a 7pc fall in earnings this year once currency moves are eliminated. The stock is worth holding.
Questor says: hold
Ticker: IMB
Share price at close: £16.28½
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