Imperial Brands cuts dividend by a third ahead of coronavirus hit

Imperial’s shares slumped 8% in early trading as investors digested the news.

FTSE 100 tobacco giant Imperial Brands has slashed its dividend by a third as it prepares for a further hit to profitability from the coronavirus crisis.

In its half-year report for the six months to 31 March, the group reported a drop in revenues and profits from a slower-than-expected take-up of e-cigarettes, and agreed the sale of its Premium Cigars business for £1 billion. It said it would cut its dividend by one-third, to pay a dividend for 2020 of 137.7p per share, and would use the savings to pay down debt.

Total revenues fell by 1.7% to £3.6 billion and operating profits slid by 9.3% to £1.47 billion.

Imperial’s shares slumped 8% in early trading as investors digested the news.

Its joint interim chief executives Dominic Brisby and Joerg Bierbernick said they expect to see growing pressures on the business from the pandemic later this year.

• How one income fund has managed to dodge all the dividend cuts

“Overall, Covid-19 has so far had only a small impact on trading but we expect this to 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,” they said.

Helal Miah, investment research analyst at The Share Centre, says Imperial’s dividend cut is a yet another blow to income-seekers, with many other dividend stalwarts including HSBC, BT and Shell recently cutting or suspending payouts.

“Although longer-term structural decline in smoking rates isn’t going away, the traditional defensive nature of the tobacco industry has seen companies in this sector less affected by the global pandemic – that’s judging by the sector’s share price performance and Imperial Brand’s first half performance,” says Miah.

“Despite the tougher times faced by the industry in recent years, the likes of Imperial were still seen as dependable dividend payers, and this morning’s rebasing of the dividend is yet another blow for income investors.”

• Three ideas for income in the dividend drought

At the end of March, Imperial had stated it had felt “no material impact” on trading from the pandemic, notes Richard Hunter, head of markets at interactive investor. However, the group has now been forced to change its tune for the rest of its financial year.

“The supply chains seemed to have held up reasonably well and the company saw stockpiling some of its products in anticipation of a slowdown, but it cannot accurately factor in the material effect on sales through its travel retail and duty-free lines, let alone any impact on consumer buying habits, such as trading down, given the inevitability of global recession,” says Hunter.

Regulation and retroactive litigation have cast long shadows on the sector over recent years, and this shows few signs of slowing, he adds, pointing to the US Food and Drug Administration’s concerns about vaping.

Imperial said net revenues from its e-cigarettes fell 43%, contributing to an 8% decline in adjusted operating profit, and so it has reduced investment into these products. Meanwhile, Imperial is taking steps to reduce its debt, which increased 6% over the reporting period to £14 billion. 

“Even so, the implied dividend yield after the cut is 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,” says Hunter.

“The shares have borne the brunt of the company’s own disappointment, having declined 24% over the last year, as compared to a drop of 18% for the wider FTSE 100. Nonetheless, the stock’s defensive attributes remain in demand, particularly during the current crisis, with the market consensus of the shares remaining a strong buy.”