Imperial Brands Announces New Dividend Policy

High-yielding FTSE 100 stock will adopt a more flexible approach to dividends after the end of this financial year, and buy back £200 million of shares

James Gard 8 July, 2019 | 10:59AM

Cigarettes

High-yielding FTSE 100 income stock Imperial Brands (IMB) has changed its dividend policy and announced plans for a £200 million share buyback programme.

The company will stick with its target of a 10% rise in its dividend this year, ending September 30, but thereafter will adopt a flexible approach to increases. The dividend will still be increased, Imperial said, but will in future take into account more in line underlying business performance. This dividend policy will form part of a wider programme of capital allocation, Imperial said, “with any surplus cash flows to be returned to shareholders via share buybacks, enhanced ordinary dividends or special dividends, depending on market conditions”.

The move is in line with other FTSE companies adjusting their dividend policy to a more flexible mandate: Vodafone (VOD) cut its dividend by 40% and Royal Mail (RMG) “rebased” its dividend so that the payout will be lower but will be topped up during good years for the business.

AJ Bell’s investment director Russ Mould says: “Having capital discipline is a good step to right-sizing the business for the next stage of its life. This change in policy also gives it more freedom to buy back shares at depressed prices.”

Imperial, which has a five-star rating from Morningstar analysts, is one of the top yielding shares in the FTSE 100. But the yield has been pushed up, like many of the FTSE’s top yielding shares, by weakness in the share price. At the start of the year Imperial’s shares were trading around £25 but are now around £20. The shares rose over 2% to £20.11 on news of the buyback and change to the dividend policy.

Morningstar places a £37 fair value on Imperial’s shares, meaning they are currently significantly undervalued. Analyst Philip Gorham says the stock market is punishing “every piece of bad news in the out-of-favour tobacco sector at present”. For Imperial’s shares to rebound, he adds, investor sentiment on the sector will have to improve significantly.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Imperial Brands PLC2,135.50 GBX-0.33
Royal Mail PLC218.90 GBX1.30
Vodafone Group PLC128.04 GBX0.90

About Author

James Gard  is content editor for Morningstar.co.uk

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