Imperial Brands PLC (LSE:IMB) is a standout performer in the tobacco industry, according to RBC Capital Markets, stating on Friday that it “continues to be the only company in European Tobacco to offer both dividend growth and share buybacks”.
This strategy has resonated positively in the current challenging market environment for Big Tobacco, with investors turning away from the sector due to ESG concerns.
RBC noted that despite Imperial Brands’ success, the overall outlook for the tobacco sector is clouded, especially following a significant write-down by competitor British American Tobacco PLC (LSE:BATS) (BAT).
According to RBC, BAT's recent £25 billion write-down served as a stark reminder of the difficulties facing the tobacco industry, particularly in the US.
Though BAT's ambitious target to shift half of its revenues to ‘next-generation products’ (NGPs) by 2035 aligns with evolving ESG concerns, it also underscores the dangers of Big Tobacco’s heavy reliance on the challenging, and declining, US tobacco market.
In contrast, competitors such as Philip Morris International have diversified away from the US more effectively, said analysts.
In light of these developments, RBC has downgraded Imperial Brands to 'sector perform' with a 1,800p price target, noting its strong outperformance relative to BAT but expressing caution due to the broader sector's uncertainties.
For BAT, RBC maintains its ‘sector perform' recommendation with a 2,900p price target, acknowledging the new chief executive's realistic expectations and the potential for upside.
However, RBC believes that BAT's performance is unlikely to outstrip competitors until it can resume its share buyback program, which has been delayed due to financial performance issues.