Imperial Brands PLC (LON:IMB) shares fell on Tuesday as the firm reduced its dividend and said cutting debt was its key priority as tobacco sales were flat and vaping revenues have tumbled in the past half-year amid the coronavirus (COVID-19) crisis.
The group said its board, which is awaiting the arrival of a new chief executive in July, has decided to “rebase” the dividend with a 33% reduction to 41.7p for the interim payment, “to accelerate debt repayment, while retaining a progressive dividend policy from the rebased level”.
The move, which is part of a revised capital allocation policy “with a view to de-risking the business and further strengthening the balance sheet”, implied that the full-year dividend for 2020 will be 137.7p per share.
Imperial Brands' net debt was £14.14bn at the end of March 2020, up from £13.4bn a year earlier due to payments for acquisitions, a settlement with the Russian tax authorities, dividend payments and lower profits.
Reported profit before tax shrank by 23% to £785mln as tobacco net revenue was flat at £3.5bn but net revenue from ‘next-generation products’ (NGPs), such as e-cigarettes and heat-not-burn tobacco products, fell by 44% to just £83mln.
Following last September’s NGP-related profit warning, which led to boss Alison Cooper stepping down, the group's interim management team said the “enhanced focus on tobacco” in the half-year has driven a 40 basis points improvement in market share to 13.6%, with gains in seven out of 10 priority markets.
“We have reduced our NGP spend following the poor returns on investment last year and this, together with recent weaknesses in the vapour category, has resulted in lower NGP revenue,” the group's joint interim chief executives Dominic Brisby and Joerg Biebernick said in the results statement.
They added that while the cigarette business remains strongly cash generative, the pace of debt reduction “has not been as fast as we would have liked in recent years” and “the board believes a stronger balance sheet will provide the business with greater flexibility for the future”.
“This has not been 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."
In early morning trading, Imperial Brands' shares dropped 5.5% to 1,563p.
Dividend cut never pleasant
William Ryder, equity analyst at Hargreaves Lansdown, said: “A dividend cut is never pleasant for investors, but debt had been steadily growing at Imperial and now seems like an opportune time to cut to the payout. The group’s long-serving CEO Alison Cooper has been replaced by two joint interim CEOs, and if they can get a cut out of the way now a new long term CEO will have a cleaner slate to work from.
"The group’s first-half results were dragged down by a poor showing from Next Generation Products (NGPs) like vaping. Regulatory restrictions and health scare headlines have significantly tempered growth expectations and sent the European and American markets into reverse. We think NGPs will have a future, but it looks like the impressive growth many were hoping for isn’t going to materialise just yet."
He added: "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. 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.”
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