Imperial Brands slashes dividend by 33%, sees Covid-19 hit in H2

Tobacco giant Imperial Brands on Tuesday slashed its dividend by more than a third as it tried to speed up debt reduction and warned of a Covid-19-related hit in the second half.

The interim dividend was cut to 41.7p a share from 62.56p a year ago, implying an annual payout of 137.7p. Adjusted operating profit fell 7.7% to £1.47bn.

Net revenue from its next generation products slumped by 43.9 per cent to £83m after the US banned certain flavours of vapes, while net revenue from tobacco was unchanged at £3.5bn.

The company added that sales of its cigarettes at duty free shops had been hammered by travel bans that have virtually shut down airports around the world, adding that it forecast no recovery in this business in the second half.

Imperial said the dividend cut was not driven by Covid-19, “although, the current uncertainties caused by Covid-19, as well as the ongoing regulatory focus on tobacco, further reinforces the importance of a strong balance sheet to underscore the defensive characteristics of our business”.

However, it did warn that the pandemic's impact would be more pronounced in the second half due to “continued pressures on our duty free and travel retail business, changes in consumption patterns including downtrading and a reversal of some first half inventory build”.

Net debt increased to £14.1bn from £13.3bn. The maker of Gauloise cigarettes last month sold its premium cigars business for €1.2bn which would be used to cut its debt mountain.

Covid-19 related factors would have a low single digit impact on earnings per share, in addition to current market expectations of a 2% fall in EPS on a constant currency basis in line with full year guidance given in February, Imperial said.

Analysts welcomed the timing of the cut, despite the impact on investors, citing Imperial's need to grapple with its debt pile.

Interactive Investor head of markets Richard Hunter said even after the rebasing, Imperial's yield was around 8% "which remains a significant attraction to income-seeking investors given the double whammy of historically low interest rates and the evaporation of dividend payments from many reporting companies".

"At the same time, the aim is for a progressive dividend policy from this rebased level which, given Imperial’s cash generation, should prove comfortable even if capital allocation is further reduced to concentrate on debt."

Hunter said the stock had fallen 24% over the last year, as compared to a drop of 18% for the FTSE100, but its defensive attributes remained in demand, "particularly during the current crisis, with the market consensus of the shares remaining a strong 'buy'.”

William Ryder at Hargreaves Lansdown said the cut would give Imperial, which would give incoming chief executive Stefan Bomhard, the boss of car dealer Inchcape and due to start in July, a clean slate to work with.

"Despite its defensive qualities Imperial does think COVID-19 will reduce profits, mainly because it’s losing duty free sales and customers may choose cheaper brands in a recession," he said.

"Social distancing measures are likely to make manufacturing less efficient too. Overall the group should still be less affected than many other groups, but the dividend cut will be painful for shareholders regardless.”