Imperial Brands Earnings: Performance in Line With Expectations and Buybacks Increased

Wide-moat Imperial Brands IMB reported a preliminary fiscal 2023 trading update indicating that the full-year performance will be in line with management’s guidance and our forecasts. The market reacted positively, with the stock up almost 4% as of the close of trading on Oct. 5, most likely due to the announcement of increased share repurchases in the next fiscal year. We are reiterating our GBX 2,900 fair value estimate and wide moat rating, and continue to believe the current market valuation undervalues the future cash flows of the business and provides an attractive investment opportunity for long-term investors.

Imperial provided very few details in its trading update, other than to say that foreign exchange will be a tailwind of around 2% to revenue in the full-year period and that operating profit will grow at the lower end of company guidance of mid-single-digit growth. This implies a decent second half of the year, with growth slightly faster than that in the first half, probably driven by price increases. Imperial is not making as many heavy investments in next-generation products as its competitors but seems to have achieved low-single-digit growth in these categories in 2023.

With the company being managed to maximize cash flow, our investment thesis is that although Imperial will not grow or compound returns on capital as quickly as some of its competitors, most notably Philip Morris International, total return should be fairly attractive due to the capacity for the generous return of capital to shareholders and because the equity is being priced at a level that undervalues the cash flows of the business. In fiscal 2024, management expects to return over GBP 2.4 billion to shareholders through dividends and share repurchases, or 13.5% of its market cap as of Oct. 5. This includes a 10% increase in share repurchases next year to GBP 1.1 billion, or 6% of the company’s market cap.