Imperial still looks solid on a long-term view
The tobacco giant's dividend payout ratio looks set to slide in the near term, but in the long term we believe the group is well placed
Revenue in the first half of fiscal 2009 increased 54% year over year. Although the company did not break out internal revenue growth, we think that almost all of the growth was a result of the Altadis acquisition in January, 2008. As we had anticipated, the firm's operating margin was hurt by the less profitable logistics operations of Altadis, falling to 16% from 21% in the same period a year ago. Imperial reported that downtrading occurred in most of its key markets in the first half. Spain was particularly weak, where bans on smoking in public places and the weakening economy drove consumption lower.
We expect downtrading to continue in the second half, and we think Imperial's portfolio is well positioned to benefit from the trend. The firm has several local discount brands and a dominant position in the loose tobacco category in most markets. However, the shift in consumption to cheaper brands should result in lower volume of the company's premium products and is likely to hinder profitability in the near term.
We think a slight drop in the firm's dividend payout ratio is possible in the near term, as Imperial continues to absorb integration costs relating to Altadis. In the long term, however, we expect the tobacco group's broad portfolio of strong brands and presence in growing emerging markets will allow it to continue to generate strong cash flows and solid returns on invested capital.
Philip Gorham is an equity analyst for Morningstar.com.