Imperial Brands' Improved Balance Sheet Strengthens Dividend Profile

Tobacco companies like Imperial Brands have historically proven a recessionary hedge, as smokers hooked on nicotine often view cigarettes as a necessity – regardless of income.

This addictive characteristic has enabled Imperial Brands to offset declining smoking rates and inflation with price increases, resulting in stable earnings.

Over the past few years, the BBB rated firm has further solidified its financial positioning by using the proceeds from selling non-core businesses and other cost-cutting measures to reduce debt and improve profit margins.
Source: Simply Safe Dividends

Backed by a much-improved balance sheet, a reliable earnings stream, and a healthy payout ratio near 50%, we are upgrading Imperial Brands' Dividend Safety Score from Unsafe to Borderline Safe.

While the firm's strong cigarette brands should continue to have pricing power, including Winston, JPS, L&B, and Gauloises, the tobacco industry is in secular decline, and prices will eventually reach a tipping point.
 
As such, Imperial Brands' foray into potentially less harmful next-generation products (NGPs) – e-cigarettes and heated tobacco – will eventually need to provide a material boost to earnings for the dividend's long-term outlook to be more secure.

NGPs accounted for less than 3% of Imperial's revenue in 2022, and the firm's smaller size compared to global rivals such as Philip Morris International, which derives over 30% of revenue from smoke-free products, could make long-term traction harder to achieve.

That said, Imperial's geographical diversification (the U.S., Germany, U.K., Spain, and Australia account for 70% of profits), top-three market share position, and established brands seem likely to keep the business a low-growth cash cow for the foreseeable future.

We will continue to monitor Imperial Brands' performance as the market for combustible cigarettes evolves and provide updates as needed.

Trusted by thousands of dividend investors.

Track your portfolio now

Our tools and Dividend Safety Scores™ at your fingertips.

More in World of Dividends