FTSE 100 tobacco giant Imperial Brands (IMB) has become the latest high-yielding company to cut its dividend in response to the coronavirus crisis.
The company is one of the last of the big dividend payers to announce changes to its income policy, following cuts by Shell (RDSB) and a freeze by BT (BT.A) in recent weeks. Alongside half-year results showing a near-20% fall in operating profit, Imperial said it will cut dividends by a third with a view to paying a 137.7p dividend for the full year.
Judging by the 7% fall in the share price, investors had expected Imperial to weather the current dividend storm and maintain payouts. Some had hoped that the 2019 decision to rebase dividends depending on future performance would save the payout from the chop this year. But the company has been at or near the top of our list of highest-yielding firms for months now – according to Morningstar Direct data, its trailing yield is 12.7% and forward yield close to 18%, a level that should have given investors sufficient warning of problems ahead.
At a current price of £15.36, a 137p dividend still represents a yield of around 9%, which could still be enticing for income investors looking for a defensive stock – for comparison, after Shell’s 66% dividend cut, its first since 1945, its yield is below 4%.
Imperial is one of two rare UK companies to have a wide economic moat and to be rated as five stars by Morningstar analysts: this means its shares are significantly undervalued. Analyst Philip Gorham assigns a fair value estimate of £35 to the company’s shares, £20 above its current share price. Helal Miah, investment research analyst at The Share Centre, argues that Imperial’s shares have proved resilient in the sell-off: “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.”
Debt Reduction
Imperial’s decision to reduce dividends is not down to a direct impact from the coronavirus, rather a an attempt to reduce the company’s debt, which is now £1 billion higher than last year at over £14 billion. 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.”
Judging by total tobacco volumes and tobacco net revenue, which have remained largely unchanged year on year, the current crisis has not dented demand for traditional cigarettes. However, revenue from its “Next Generation Products”, which includes vaping, has fallen more than 40% year on year amid regulatory challenges, especially in the US.
Dividend cuts and suspensions have been coming thick and fast since the coronavirus struck: a recent survey by Janus Henderson estimates that under a worst-case scenario, global payouts could fall 35% this year; and Link has put that figure at 50% for UK dividends.
"UK dividends are heavily reliant on a few very large companies, so the risk is very concentrated here, highlighting the value of global diversification. Overall UK payouts will be severely hit this year, in a similar way to those in Europe," Janus Henderson says.
Income fund managers, from Evenlode’s Ben Peters to Liontrust’s Storm Uru, are having to think carefully about how to navigate dividends in the current environment. Many managers plan to look overseas for income, focus on strong brand companies, or look away from the obvious FTSE 100 names.
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