Cigarette maker Imperial Brands PLC (LON:IMB) unveiled a £200mln share buyback to sweeted the pill as it relaxed its future dividend policy.
Confirming that it still plans to increase its dividend 10% for the current trading year, the FTSE 100 tobacco giant said from next year it will adopt a "progressive dividend policy", meaning the dividend will grow annually in line with underlying earnings.
READ: Imperial Brands sinks as tobacco volumes lag, US vape category slows
Imperial said the new dividend policy was part of a wider review of how it allocates capital investment, balancing shareholder returns with a “strong but efficient balance sheet” and investment in next-generation products like vaping and heat-not-burn tobacco, mergers and acquisitions, while boosting its coffers with divestments of non-core assets.
As well as a progressive annual dividend, the new approach will see “any surplus cash flows returned to shareholders via share buybacks, enhanced ordinary dividends or special dividends, depending on market conditions”.
Shares in Imperial were up 2% to 2,003p on Monday morning, having more than halved over the past three years.
'A more realistic dividend'
Broker Liberum said stepping away from its 10% dividend growth policy was “an important step in the right direction” and said the buyback was appropriate as shares are “attractively priced… so this is accretive to earnings and most importantly equity”.
The broker added: “We like the revised policy because it should help to restore confidence and credibility to the dividend policy, which is now more realistic and sustainable. It also silences the bears who anticipated a dividend cut.”
Noting that Imperial Brands’ shares have been popular among retail investors for their generous dividend yield, recently around 10%, Russ Mould, investment director at AJ Bell, said there had been growing concerns in the market that its rate of dividend growth was unsustainable if the company were to keep the rate of net debt to earnings at comfortable levels.
“Its share price has been in a falling trend for the past two years as investors didn’t like the threat of growing regulation in the US and lacklustre expansion of next-generation products.
“Having capital discipline is a good step to right-sizing the business for the next stage of its life. This change in policy also gives it more freedom to buy back shares at depressed prices.”
Concerns remain
JPMorgan Cazenove saw the addition of share buybacks into the mix as "especially attractive at current share price level" and praised "the acknowledgement that its dividend policy was unsustainable" along with the "increased flexibility" around free cash flow usage.
However, the JPM analysst "remain concerned about the potential need for organic, or M&A led, investments following disappointing NGP growth in H119 and increased competition in alternative nicotine’s products".
Analysts at RBC Capital Markets said the abandonment of the 10% dividend growth target "should have happened a while ago" and still felt that Imperial's balance sheet was "precarious", forecasting net debt to be three times EBITDA by September, "based as it is on profitability from an industry undergoing significant disruption in the form of next generation products".
Nicholas Hyett at Hargreaves Lansdown agreed that the group’s large, stable and growing dividend has been the stock’s “main attraction for decades” but recently had not been enough to support the share price, which is down over 50% since 2016 despite dividends rising by 10% a year.
He said the change in policy “makes sense” as “a double digit dividend yield is more than any investor needs or can reasonably expect in the current climate, and throwing more money at shareholders has failed to make the shares more attractive”.
He added that the announcement highlighted an "interesting feature" of the wider tobacco industry, as increased investor focus on ethical investments "seems to be hitting demand for the shares faster than it’s turning Imperial’s customers off smoking”.