Market's view on Imperial Brands
Published on April 2024
- BAT is utilising the approximately £1.5B net proceeds from the disposal of an ITC stake for a buyback programme, aiming to cut nearly 3% of stock over two years, while IMB’s ongoing £550M buyback will remove 3.5% of stock in just 6 months.
- BAT currently offers a higher yield of nearly 10% on its depressed share price compared to IMB’s 8%.
- There is a debate on the efficacy of private equity’s typical strategy of leveraging buyouts with debt, particularly noted in the tobacco industry where companies traditionally carry significant debt.
- Concerns are noted regarding the potential vulnerability of companies to takeover bids if they reduce their debt levels excessively, with private equity firms likely to leverage such buyouts.
- Discussion on the airline industry’s current profitability due to post-COVID under-capacity, but long-term sustainability of earnings questioned due to highly cyclical nature and capital-intensive requirements.
- Criticism of past buybacks in the airline industry, specifically pointing out how these actions contributed to financial distress during the COVID crisis necessitating massive government bailouts.
- Issues raised about the understanding and implications of investment vehicles like ‘patient capital’, highlighting the Woodford fund crisis as an example of poor liquidity management and the mismatch of expectations in fund investments.