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A Balanced Look At Heavily Discounted Tobacco Stocks - Part 3: Imperial Brands PLC & Its 10%+ Yield

Published Thu, 31 Oct 2019 10:22:45 -0400 on Seeking Alpha

Source: Imperial Brands
Unlike Altria Group, Inc. (MO), Imperial Brands PLC (OTCQX:IMBBY) derives most of its sales from Europe. Imperial didn't always yield ~10.5%; the stock has declined by approximately 60% since 2016's cyclical peak. 2018's cash dividends paid, however, are triple those of 2009. That's an incredible feat and a testament to the cash generating power of "Big Tobacco." Our longer-term subscribers and followers won't be surprised by what comes next: there is a catch.
A few, actually.
In last quarter's financial reports, there was an across the board but unexpected spike lower in cigarette volumes spooking investors. Large tobacco companies have been betting heavily (tens of billions) via acquisitions and product development on the vaping industry. While sales growth has been phenomenal, more and more studies are linking vaping to potential lung issues. Imperial's management recently announced they would no longer target 10% annual dividend growth. This raised concerns regarding not only the dividend but the company's financial durability. Imperial Brands' earnings per share ("EPS") dividend payout ratio has steadily climbed from just 55% in 2009 to 72% in recent quarters. This alone is good for a slow growing firm with a double digit yield, but the picture deteriorates when reviewed by free cash flow. We will not automatically take these assertions as truth.

Source: Yahoo! Finance & WER
Above is a two year chart of the S&P 500 ETF... Read more

Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
ALTRIA GROUP 44.46   13.2 3.36 3.36 7.23
BRITISH AMERICAN TOBACCO 37.99   0.0 0.00 2.68 6.64
PHILIP MORRIS INTERNATIONAL 74.90   14.9 5.03 4.68 6.12


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