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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.
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