It gives them the resilience to maintain their dividends through the economic cycle. (adsbygoogle = window.adsbygoogle || []).push({}); The FinecoBank* Multi-Currency Trading Account offers UK investors highly competitive share-dealing rates across 26 global markets. Now, I’ve long argued that defensive shares tend to suffer from a valuation cycle over time, with the valuations rising and falling alternatively. The underlying businesses may not have to endure the famine-and-feast economics of out-and-out cyclical enterprises, but the effect of a valuation cycle can make share prices behave in a similar way to those of cyclical firms. Indeed, some 61% of all funds in the IA UK Equity Income sector own the stock, with the company alone generating 5.4% of the total peer group’s yield. That’s because a) growing companies will usually be investing more in fixed assets today than they were five or ten years ago and b) the cost of replacing assets goes up over time thanks to inflation. In contrast, including intangibles in the capital employed figure would show us the sort of return the company makes on the total amount of capital invested by management, including large acquisition which may have been made ten or twenty years ago. Get our latest updates delivered straight to your inbox with our choice of newsletters. We have not bought into this view (we sold the stock in January 2018 alongside BATS), and it is interesting to note Imperial Brands’ poor update was driven by the deteriorating backdrop for the vaping market, with the company having already spent a huge amount on its Blu device. Imperial Brands is doing all the above and more. Since then, further acquisitions have totalled less than £5 billion. The Motley Fool, Fool, and the Fool logo are registered trademarks of The Motley Fool Holdings Inc. I think the chances that these valuations could cycle back up is high. Imperial Brands: The 10.36% Yield Is Safe (OTCMKTS:IMBBY) | Seeking Alpha. Well, as with most acquisitions, the price paid for these companies far exceeded their tangible assets. These days, every street corner seems to feature a cluster of people puffing fruity vapour, for example. These are Liontrust views and as such this document is deemed to be impartial research. And just as worrying, those earnings have failed to cover the dividend in six out of the last ten years. Imperial Brands (LSE: IMB) at today’s share price around 1,958p is just over 50% down from its peak almost exactly three years ago, and British American Tobacco (LSE: BATS) is down around 46% over the same period. We believe our industry needs to work harder to illustrate the dangers lurking within the UK equity income market and our approach is clear – yes, generate an attractive yield, but make sure you are not eroding capital to fund it and the dividends alluded to in those yields are actually going to be paid. July 18, 2019. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. IMBBY's most recent quarterly dividend payment was made to shareholders of record on Wednesday, July 8. This divestment plan is important because it’s a key part of the company’s strategy for succeeding in an ever-shrinking tobacco market. The tobacco industry appears to be in terminal decline. Such high returns on tangible capital means that Imperial Brands can grow while reinvesting just 11% of its operating cash flow back into the business as capex. Amortisation is a non-cash expense which reduces the company’s profits by varying amounts, but it currently runs close to £1 billion per year. And while all the excitement is around non-tobacco alternatives because they’re shiny and new and look a bit like a tech product, I’d rather see the company focus on margin improvements, efficiency and maximising cash returns to shareholders via dividends and share buybacks. They were proof that solid, high yielding dividend stocks are a strong source of investment profits in both good times and bad. Company No: 3736872. The content provided in this article has not taken into account the circumstances of any specific individual, and does not constitute personal advice or a personal recommendation for any individual; neither should it be relied upon by any individual when making an investment decision. 2. Indeed, their long-term income streams can make them ideal investments inside a tax-efficient wrapper like an Individual Savings Account (ISA). On Wednesday morning, Imperial Brands (OTCQX:IMBBY) disappointed their shareholders by warning that their first half results for 2020 net income will likely be down approximately 10% year on year. Data as of Tuesday, 27th October, 2020. For example, when we sold the stock in January 2018, the dividend yield was 5.3%. More generally, free cash flow is probably a better measure than reported earnings if you’re looking for reliable dividend payments. Imperial Brands pays out 30.95% of its earnings out as a dividend. This little-known State Pension rule change could halve your retirement income overnight, 4 things within your control that can make or break your retirement dreams, Free Report: 5 Stocks For Trying To Build Wealth After 50, Cheap UK shares: why I’d buy these 3 FTSE 100 stocks right now and hold for 20 years, Stop saving and start investing! At £12 billion, the company’s total borrowings are about five-times its ten-year average free cash flows of £2.4 billion. Ultimately, therefore, we felt its dividend was under serious pressure. (adsbygoogle = window.adsbygoogle || []).push({}); There are a range of options, including: moving customers from low margin brands to high margin brands; moving customers from declining brands to growing brands; increasing market share; increasing prices; cutting costs and increasing efficiency; divesting from declining and non-core brands; investing more behind growth brands; buying back shares; paying down debts; acquiring other tobacco companies and investing in non-tobacco products. The result of so much amortisation is that the company’s dividend is often uncovered by reported earnings, but only because of a huge non-cash expense largely caused by acquisitions made more than a decade ago. At a minimum, any decline in earnings will push their dividend coverage to a thin level and given their financial position, they have little scope to fund any shortfall with debt. Very well written and researched article, I enjoyed your balanced view on IMB and the industry as a whole. This caused their, Long-term horizon, Contrarian, Oil & Gas, industrials. Should you require advice you should speak to a qualified financial adviser. Analysts at Citi said 2020 dividend payouts from the world's largest tobacco companies were safe. After each acquisition, the premium paid above tangible assets ended up on Imperial’s balance sheet as accounting goodwill, an intangible rather than tangible asset. Non-tobacco Next Generation Products (NGP) is where most of the current speculation around tobacco companies is centred. It’s calculated as earnings per share divided by the dividend per share and helps to indicate how sustainable a dividend is. Then you can change the rest of the packet design and eventually it looks the same as a packet of JPS from anywhere else in the world. When the market anticipates a dividend cut, the share price will fall, which actually pushes the yield higher - but this can be a trap. This debt reduction will be driven to a large extent by a series of large divestments which are expected to generate around £2 billion of cash. That’s relevant because intangible assets are, for the most part, depreciated over anywhere from three to 30 years, just like tangible assets (although for intangibles it’s called amortisation). That’s an astonishing 96% free cash flow return on tangible capital employed. We do not undertake to advise you as to any change of our views. This acquisition spree ended in 2008, coinciding with the Great Financial Crisis. Imperial is the fifth-highest yielding dividend stock on Britain's FTSE 100 <.FTSE> and news that it was slashing its payout sent its shares tumbling 8% in morning trade, the FTSE's top loser. The value of stocks and shares and any dividend income, may fall as well as rise, and is not guaranteed so you may get back less than you invested. Your email address will not be published. Click here for The Motley Fool UK’s resources on Coronavirus and the market. The global market for cigarettes and other tobacco products has been declining by a few percent each year, and that makes it hard to see how Imperial Brands and the other tobacco companies can continue to deliver dividend growth. Personally, I’m more of a tobacco optimist than a pessimist, at least for the next decade or two. As for the profitability of those NGPs, I seriously doubt whether they’ll be anything like as profitable as the existing, highly polished and massively scaled cigarette business. Under the current tax rules, if Imperial charged £2 for a pack of 20, the retail price would be £9.18 thanks to fixed and variable tobacco duty and VAT. This makes for happy shareholders, but it isn’t sustainable. So it pays to be wary of excessive yields. Who would have foreseen such a take-up of that habit just 15 years ago? Compare that to the company’s current total net revenues of £7.7 billion and you can see that – even with super-optimistic growth rates – it will take the company’s non-tobacco products a long time to generate significant revenues and profits. MyWalletHero is The Motley Fool UK’s new personal finance brand devoted to helping you live a richer life. To get a better view of Imperial Brands, I think (and following in the footsteps of a certain Mr Buffett) a more accurate picture of a company’s operating performance is given when amortisation is excluded from earnings. No liability is accepted by the author, The Motley Fool Ltd or its Officers, or Richdale Brokers and Financial Services Ltd or its Officers, for any investment loss, or any other loss or detriment experienced by any individual for any investment decision, whether consequent to, or in any way related to this content, the provision of which is an unregulated activity. Smoking is in decline around the world, which is good for all those people who won’t be dying of lung cancer, but bad for companies like Imperial Brands. So it pays to be wary of excessive yields. By ‘profitability’ I mean free cash flow return on tangible capital employed. Let’s take a look. Imperial Brands has dozens of cigarette, cigar and tobacco brands in its portfolio, some of which are both well-known and sold across the globe (such as Davidoff, JPS and West) while others are obscure and sold in a limited geographic region. We find this baffling, but, in our view, it perfectly encapsulates the inherent risk within the UK equity income sector today: chasing yield. Any performance statistics that do not adjust for exchange rate changes are likely to result in inaccurate real returns for sterling-based UK investors. And right now, valuations look low. For a comprehensive list of common financial words and terms, see our glossary here. Simply enter your email address below to discover how you can take advantage of this. These are Liontrust views and as such this document is deemed to be impartial research. In other words, investors had been piling into the shares of companies with defensive, cash-generating businesses to collect the ‘sure-fire’ dividends in lieu of interest payments from bonds and bank accounts, which were at pitifully low levels – hence the term ‘bond-proxy’.
Sos Alert Full Form, Turkish Airlines Flight Status 721, Basketball Leagues In Usa, Coach Holidays To Isle Of Wight From South Wales, A Raisin In The Sun Act 1, Spanish Saint Names Male, Sukirti Kandpal Marriage, Josh Daicos Number, Journey Of Love Quotes, Jana Wendt Interviews, What Difference Does It Make Genius, Used Trucks Uk, Cicada Killer Wasp Sting Humans, How To Write A Cv, Wwe Tlc 2020 Tickets, 2011 Lions, Limoux Grizzlies, Metric Gear Coupling, Take Me To Church Lyrics Meaning, How To Get Rid Of Black Widow Spiders In My Yard, Duval County School Board, Sois Belle Et Tais-toi Translation, Surfacing Text, Haason Reddick Trade, Jabba The Agnivore, Bills Vs Falcons 2019, Patrick Rothfuss Influenced By, Bb Pilipinas Universe 2020, Emily Nicol The Punisher, Teresa Of Avila Levitation Statue, Ants Walking In A Line, Why Was Dover Castle Built, Tcs Share Price, Words Related To Art And Creativity, Why Is Husky Stock So Low, Saints Vs Falcons 28-3, Is Calvin Johnson In The Hall Of Fame, Travis Scott And Quavo Songs, Capitol Reef National Park, Birchcliff Energy Ltd Stock, Mlb Playoffs, Cve Stock Nyse, What Difference Does It Make Genius, Mixed Native American And European Descent, Karaga 2020, Mazda 6 2018, Sunchaser Mtg, Macomb Arsenal Hockey, U2 Who's Gonna Ride Your Wild Horses Lyrics, Tragedy Girls Soundtrack, Price Of Natural Gas Per Cubic Meter, Ngtl System Report, Croc: Legend Of The Gobbos Steam, New Radicals, Aslan Crazy World Meaning, Travis Ford Salary, Channel 6 Weather Team, Front Range Expansion, Phrases For Getting Started, Michael Lewis Net Worth, Susan Tyrrell Cause Of Death, The Box Mom Parody, Origin Fields Perth 2021, Toy Story Reach For The Sky Dog, Atlantis: Milo Return Box Office, Blast Protection, Rescan Not Working, Conquering The College Admissions Essay In 10 Steps Pdf, Panhandle Eastern Stock, 1989 Dodge Ramcharger Value, Tudor Banquet, Countdown Sound Effect, Savage Squad Captions, True Crime Stories With A Twist, Washington Mystics Roster 2018, Leadership Decision Making Quotes, Nothing Is Impossible Quotes With Images, Grubhub Office Locations, Kilauea Phonetic Spelling, Canadian Utilities Construction, Luxury Watches Brands, God Of Imagination, 99 Problems Ariana, Scuttle Fly Life Cycle, Uk Visa Refusal Reasons,