Imperial drops dividend target to bolster tobacco alternatives

Imperial Brands, the maker of Winston and Lambert & Butler cigarettes, will drop a longstanding dividend target to fund investment in tobacco alternatives as smoking declines in western markets.

The FTSE 100 company said on Monday it would end its 10 per cent annual growth target for its dividend after this financial year and base its future payouts on the performance of the business.

It follows other FTSE companies, including Vodafone, Saga and Royal Mail, which have also revised down targets or cut dividends this year.

Imperial has maintained its dividend growth at 10 per cent for the past 11 years, prompting questions over how much longer it could be sustained. It was the 12th-largest dividend payer among UK companies this year.

The company also announced a £200m share buyback scheme.

Imperial has struggled against other multinational tobacco companies as they compete for new opportunities in the ecigarette market to offset a steady fall in the number of smokers in western economies.

Despite retaining Hon Lik, the inventor of e-cigarettes, as an adviser to Imperial’s vaping arm Fontem Ventures, sales of the tobacco company’s so-called next generation products have fallen behind analysts’ expectations.

In the six months to the end of March, Imperial said sales of next generation products had tripled to £148m but this was against a £176m forecast from City analysts.

The Bristol-based company said the revised dividend policy would allow it greater flexibility and that it would free up capital to invest in both e-cigarettes and other sectors “not massively far removed from tobacco” such as caffeine and cannabis.

In June last year, Imperial took a stake in Oxford Cannabinoid Technologies, a biotech company focused on uses for medicinal cannabis. It has also appointed Simon Langelier, a medical cannabis expert, to its board.

Alison Cooper, chief executive, said at a conference at Deutsche Bank last month that Imperial had “dipped a toe” with its investment in OCT but that “a modest further move into the cannabis space is something that would work well for us as a business and we’re very keen to take that forward”.

The company is looking to trim the number of brands in its tobacco portfolio. In April it announced the sale of its premium cigar business, which included brands such as Cohiba and Montecristo, as part of a £2bn investment programme.

Imperial’s share price has fallen almost 17 per cent since the beginning of the year. On Monday it was up 2.4 per cent to £20.08 in lunchtime trading.

Analysts at Liberum said Imperial had “ample IP [intellectual property], people and brands to take share in the fast-growing vapour category”. They noted that the revised dividend policy should “restore confidence and credibility” and would “silence the bears who anticipated a dividend cut”.