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Imperial Brands

Analysing companies' finances and value from their financial statements using ratios and formulae
TUK020
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Imperial Brands

#473146

Postby TUK020 » January 14th, 2022, 6:20 pm

This is not so much an analysis of a companies accounts, more of a plea to someone more adept at dissecting these statements to help point out what I am missing.

According to HYPTUSS, Imperial Brands is trading at a price giving a PE ratio of 6.6, and a dividend yield of 8.4% which is covered 1.7x in earnings.
Over the last few years, earnings have been depressed by goodwill write offs, capital expenditure is not significant, so free cash flow easily covers dividends. The company is not saddled with debt, runs decent margins and is slowly edging up earnings, and reducing costs.

The growth story is dubious, margins in Next Generation Products are likely to be much reduced, and IMB is behind some of its much bigger competitors in establishing themselves in NGP. Future potential for adjacent markets such as cannabis in vaping machines remains a possible, but low probability payoff.
Regulatory risk is there in terms of increased regulation in developed markets slowly squeezing revenue in core cigarette volume. This is already priced in by the market (priced for terminal decline), but a significant portion of sales will continue in emerging markets where the regulatory threat is much less developed.
Major institutional shareholders regard new investment in tobacco as poisonous PR, and so are looking to reduce their exposure; any market price strength/upside is likely to be met with major institutions unloading their position - this means that the share price is depressed, and is likely to stay that way.

A lot of HYP adherents would describe IMB's yield as in the "Danger Zone" (to use Luni parlance).
But it appears to me that I have an opportunity to buy into a cash generation machine, that at current sp is likely to give me back 40-50% of my money in dividends over the next 5 years, and is still likely to have 85% of that generation machine running at the end of that time.

What am I missing?

BT63
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Re: Imperial Brands

#473154

Postby BT63 » January 14th, 2022, 7:01 pm

Do you remember 1999?

A time when the Fed's easy money was puffing up bubbles, especially in tech and growth companies, causing old economy and value shares to severely fall out of favour.

Also a time when companies like IMB (then IMT) and BATS were relegated to the FTSE 250 index by market darling zero-profit TMT companies and fear of the demise of tobacco companies due to major US legal action and declining trends in tobacco.
Within a few years most of the TMTs joined the 99% club while IMT, BATS and other large mature companies re-took their places in the FTSE 100.

Tobacco looks a decent value sector to me. Worth having as part of a suitably diverse portfolio.

I have a reasonable holding in IMB (about 6% of portfolio) which I've had for so long it only needs to pay another £2.27 per share to have got all my initial investment back. I also once held GLH until they were taken over.
I regularly get tempted to add more IMB, or start a new holding in BATS (which were always a little too pricey when I had cash to burn in the past).

However, I probably won't add any more tobacco but only because I'm more interested in accumulating-on-weakness what most people would consider 'weird' investment options at the moment.

Dod101
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Re: Imperial Brands

#473163

Postby Dod101 » January 14th, 2022, 7:19 pm

I do not think you are missing anything. It is those who bought in when the price was about double the current price that are struggling. I have held both of the tobaccos for at least 20 years and my gripe is (and nothing to do with them) that the price fell through the floor two or three years ago. Now it seems to have stabilised and in fact is gently increasing as the factors that the OP mentions are coming in to focus for new investors presumably.
I have held both tobaccos for more than 20 years and have long since extracted my initial investment from at least Imperial and probably BAT as well.

I think the OP is now on the money again.

Dod

BT63
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Re: Imperial Brands

#473188

Postby BT63 » January 14th, 2022, 8:45 pm

Dod101 wrote:I do not think you are missing anything. It is those who bought in when the price was about double the current price that are struggling.


When IMB were £40 a few years ago I was very tempted to sell or take profits.
I didn't sell because they're part of a 'try not to tinker' portion of my portfolio designed to provide a reliable stream of income.
Although IMB shares have fallen significantly, the income dependability in Covid times was excellent, as were most of the other shares I hold in that part of my portfolio.

For similar 'no tinker' reasons I didn't sell AZN at £100 last year when I probably should at least have taken profits.

MrFoolish
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Re: Imperial Brands

#473321

Postby MrFoolish » January 15th, 2022, 4:35 pm

TUK020 wrote:But it appears to me that I have an opportunity to buy into a cash generation machine, that at current sp is likely to give me back 40-50% of my money in dividends over the next 5 years, and is still likely to have 85% of that generation machine running at the end of that time.

What am I missing?


It depends how quickly smoking drops off over those 5 years. Your 85% figure may be too optimistic. If their revenue and dividend distributions start to drop off quite quickly, the share price (which is forward looking) will drop off even more quickly. You will then have the dilemma of sitting on a capital loss in a company in a potentially terminal market. Do you then sell?

Of course, if they are successful in getting enough people in developing nations addicted to their life-limiting products then you may get away with it.

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Re: Imperial Brands

#473606

Postby vand » January 16th, 2022, 6:51 pm

People always seem to underestimate Tobacco companies... that's why it's been one of the greatest performing sectors of the stock market for as long as anyone can remember. Sure, the number of smokers in the world is probably past its peak, but there is going to be a very long and very fat tail that can be exploited.

You can't uninvent something.. and I'm pretty confident that nicotine products are going to be with us 10 years and 100 years from now.

Paultry
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Re: Imperial Brands

#473639

Postby Paultry » January 16th, 2022, 9:52 pm

Is it also the case that many ethical institutional investment groups are obliged to avoid tobacco companies, even more so in recent years.

If that is true, the exceptional dividend yield, although in Luni's danger zone, could explain why the shares are unloved.

I hold BATS and IMB. Paul

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Re: Imperial Brands

#473641

Postby bluedonkey » January 16th, 2022, 9:58 pm

Look at basic EPS versus adjusted EPS.

vand
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Re: Imperial Brands

#473779

Postby vand » Yesterday, 12:45 pm

Yes, many fund managers just won't touch them now, and oil/miners either for ESG reasons (and "reputation").

No problem at all with that - it's their choice. It's worth noting that Neil Woodford stuffed his fund full of baccies in an attempt to return to his basics and turn things around just before it got closed.


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