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Imperial Brands Finally Faces The Reality Their Dividend Growth Was Unsustainable

Published Thu, 11 Jul 2019 12:17:34 -0400 on Seeking Alpha

Introduction
It was pleasing to see that Imperial Brands has announced a new and more suitable dividend policy earlier this week, which I believe was a timely decision given it was an inevitable outcome. Earlier this year I published an article outlining the reasons they had minimal scope to continue their old dividend policy of 10% annual increases. This article will provide my thoughts on this topic both retrospectively and going forward into the future.
Background Situation
I'll briefly restate the main points from my previous article to provide further context for my discussions in this article. When reading their latest annual report I noticed their Chairman, Mark Williamson, stated "our dividend policy is to deliver annual 10 per cent growth over the medium term". This wasn't their only financial objective, with page ten of their annual report stating their plan to use their operating cash flow to "pay down debt and reinvest in the business".
Given their stable yet moderately leveraged financial position, of which lowering was another one of management's objectives and their high dividend payout ratio that was accompanied by a decade of anemic free cash flow growth, it was fairly obvious this policy was unlikely to survive much longer. In my original article I concluded that there was only one to three years before their dividend payout ratio would exceed 90% and thus prohibit further large dividend increases without jeopardizing their financial position.
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