Imperial Tobacco expects to report low-single-digit growth in first-half underlying revenue, when ignoring currency movements. A small decline in combustible volumes has been more than offset by strong tobacco pricing and improved Next Generation Product (NGP) sales.
In aggregate, Imperial expects that its share of its top five markets has declined modestly during the first half, reflecting a greater focus on more profitable segments. Underlying operating profit was slightly higher than the same period last year.
The company noted a more uncertain geopolitical and macro environment. However, financial performance is still expected to improve in the second half. Full-year guidance for underlying operating profit growth of 3-5% and free cash flow of at least £2.2bn was unchanged.
Just under half of this year’s £1.45bn share buyback has been completed.
The shares were down 8.4% in early trading.
Our view
Imperial Brands had a slow but steady start to the year. If momentum picks up as expected in the second half, underlying operating profit growth of 3-5% for 2026 should still be in reach. However, with losses widening in Next Generation Products and market share in key regions moving in the wrong direction, investors were left underwhelmed on the day.
While volume pressures have eased, the company has leveraged the addictive nature of its product and invested in its brands, allowing it to keep moving prices upwards. We still see potential for further price hikes in many of Imperial’s most important markets.
Tobacco companies need to move with the times. Regulatory pressure and changing consumer preferences towards healthier lifestyles means we think there will be further challenges ahead.
That’s why the entire industry’s jostling for position in the up-and-coming Next Generation Products (NGPs) market, including products like heated tobacco and vapes. It’s not been an easy start for Imperial, and while a more focused approach to the NGP portfolio is starting to bear fruit, these products are still a relatively small part of the picture and are yet to turn a profit.
It’s too early to say if they can be a viable replacement for the shrinking tobacco business. First, we will need to see several years of high double-digit growth and demonstrable evidence of sustainable profit margins. Another risk to the success of NGPs is the increasing attention they are receiving from regulators.
Cash generation has impressed consistently. That’s supporting generous distributions to shareholders and investment in new products, all while keeping net debt towards the bottom of Imperial’s target range.
We think shareholder distributions are an attractive part of the investment case, but we’re not alone. Investor sentiment has strengthened significantly over the last couple of years, meaning the prospective dividend yield of 5.6% isn’t quite as high as it once was. While no shareholder payouts can be guaranteed, buybacks also remain part of the picture. But the higher valuation means the benefits to shareholders won’t be as pronounced.
The higher valuation also increases pressure on the company to deliver sustainable profit growth. For sentiment to keep strengthening, the company needs to convince investors it can step things up a gear. But with the new CEO Lukas Paravicini so far sticking to the game plan laid down by previous management, we don’t see too many catalysts on the horizon.
Environmental, social and governance (ESG) risk
The food and beverage industry tends to be medium-risk in terms of ESG though some segments like agriculture, tobacco and spirits fall into the high-risk category. Product governance is a key risk industry wide especially in areas with strict quality and safety requirements. Labour relations and supply chain management are also industry-wide risks, with other issues varying by sub-sector.
Imperial Brands’ overall management of ESG issues is strong according to data by Sustainalytics, but we have some concerns. The company has stressed its commitment to offer smokers a choice of potentially less harmful products. However, in 2023 next-gen products made up just over 3% of net revenue. The company is also involved in controversies related to business ethics (including child labour and employee exploitation in the supply chain), marketing practices, and the social impact of its products.
Imperial Brands key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
