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Imperial Brands: A 12% Yield And Strong Pricing Power, But Uncertainties Remain

Published Mon, 24 Feb 2020 15:38:32 -0500 on Seeking Alpha

Imperial Brands has taken a beating over the past five years amid uncertain long-term outlook.
Financials remain solid with a well-covered dividend, though its growth is unsustainable, at this rate.
While the future of tobacco sales and NGP products is uncertain, the juicy dividend yield and the stock's depressed price could end up being a good entry point.
Imperial Brands (OTCQX:IMBBY)(OTCQX:IMBBF), the second-largest British tobacco manufacturer (behind British-American Tobacco), has suffered huge losses since its 2016 top, with the stock being slashed by more than half of its value. The market has had little excitement for the future of tobacco products, which feature minimal to no growth, strict regulation measures, as well as an uncertain future. Recently, the company also lowered its guidance, projecting an EPS fall, further depressing the stock, which now trades almost as low as its great recession levels, as the graph indicates below.

My thesis
Despite the pessimistic environment surrounding tobacco, Imperial Brands showcases a compelling investment case, led by its well-covered fat dividend yield, as well as its potential successful investment to what it calls NGP (Next Generation Products). The company is well-positioned to cover its current ~12% yield, as well as aim to ensure future growth by offsetting the potential lower demand for tobacco by its NGP line. Finally, despite its downsides, the tobacco industry has incredible pricing power, featuring a resilient inelastic demand, that can assist the company to both maintain its EPS, and endure through a potential correction/recession in the markets.
Earnings and pricing power
The company's stock took a beating earlier in the month after management announced it expects a 10% decline in first-half profit, which created uncertainty on whether the already slashed guidance could be met.
Since then, shares have fallen further, at a decade-low level, as investors struggle to see a... Read more

Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
PHILIP MORRIS INTERNATIONAL 74.90   14.9 5.03 4.68 6.12