Imperial Brands again lifts dividend 10% after currency boost

Tobacco volumes fell less than expected at Imperial Brands this year and the cigarette maker once again lifted its annual dividend 10% as currency tailwinds were not enough to puff earnings above consensus forecasts.

As she continues to plan further investment as the company battles a volatile industry environment, chief executive Alison Cooper said the medium-term target was still to deliver "constant currency revenue and earnings per share growth", as well as further years of 10% dividend growth.

For the 52 weeks to 30 September 2017, tobacco volumes shrank 4.1%, meaning adjusted net tobacco revenues of £.76bn were only up 8.2% on the previous year thanks to the weaker pound, down 2.6% if this benefit was removed.

Likewise, adjusted operating profits at constant currencies declined 3.2% to £3.76bn and adjusted earnings per share fell 2.2% at constant currencies to 267p, which was 1.4% below the City analyst consensus.

Imperial said constant currency results were impacted by a "tough trading environment" and increased investment in its key brands, which helped deliver market share gains in most priority markets, with volumes for 'growth brands' up 5.5%.

Fortunately, the benefit of the sterling slump meant EPS was lifted 7% at the reported level and with strong cash flow allowed a further interim dividend of 59.51p per share and a final dividend of the same amount to be give a total payout of 170.7p, sealing a ninth consecutive year of 10% dividend growth.

Cooper said this was "an important year of progress" to build on previous work to strengthen the brand portfolio.

"Our results benefited from the overall share momentum which supported improved second half net revenue despite a particularly tough industry backdrop.

"As anticipated, whilst the increased investment impacted current year revenue and profit it is strengthening the business to support improved top-line growth going forward from both tobacco and next generation products."

For the new 2018 financial year, Cooper said Imperial will build on this momentum and "continue to take necessary actions to protect our investments and deliver quality revenue growth in tobacco" and step up activities in next generation products.

The plan is to invest £300m in next generation products in 2018, including consumer trials heated tobacco trials and new e-vapour launches in new and existing markets, which analysts suggested was a lower indicated spend than some had feared.

Cooper also stressed the "decisive cost action" taken "to mitigate a tough trading environment and to protect our investments".

IMB shares were more than 2% higher at 3,153p after an hour of trading on Tuesday.

Planned launches of next generation products, including heated tobacco trials, have been largely anticipated by the market, said Investec analyst Alicia Forry, but may mitigate disappointment over a consensus forecast miss for EPS and operating profits.

"Investments in growth markets have held back the margin, but should support better performance in FY18. Volumes are modestly ahead of expectations and the US business is picking up," she said, noting the shares yield an attractive 5.7% on the 2017 dividend.

Drilling down into the numbers, Forry said Logista profits were disappointing as excise increases in Italy and France were absorbed, while the core business saw weak trading in Russia and the increased investment in growth brands and markets holding back margins.

Offsetting this, the US business, which contributes 21% of revenue and 28% of operating profit, delivered improved performance, with positive price and mix.

Analyst Nicholas Hyett at Hargreaves Lansdown said the first thing he does on opening a set of Imperial results is look for medium-term dividend guidance.

"That’s a reflection of the importance of Imperial’s dividend policy to investors, and also a niggling worry that at some point one of the most generous dividend policies in the market has to come to an end.

"Imperial has to contend with a seemingly relentless decline in tobacco volumes, despite making progress in key geographies and brands. A recent uptick in investment is helping to slow that decline, but it’s an industry wide problem.

"Nonetheless, Imperial’s commitment to grow the dividend by 10% a year “over the medium term” is legendary. Fortunately the company generates bucket loads of cash, and a combination of price rises and a firm grip on costs has allowed it to hold up the bottom line. There are other demands on the group’s cash flow at present, not least reducing a significant debt pile, but the dividend remains top priority.”