It is easy to believe that smoking may be illegal in much of the developed world in 30 years’ time. The authorities are moving inch by inch to make the habit more difficult to pursue. The European Court of Justice yesterday threw out a challenge by the industry on curbs on packaging and on menthol cigarettes.
Plain packaging will arrive in this country next year. The impact of all this on the numbers of people smoking is hard to quantify. Imperial Brands, which was quietly retitled from its venerable Imperial Tobacco name earlier this year, suffered a fall in the number of cigarette equivalents sold of 3.1 per cent in the six months to the end of March, despite the addition of several American brands that became available on the merger in the US of Reynolds and Lorillard.
That was exactly the rate of decline reported in the last set of full-year figures. Imperial is concentrating on territories that are making good returns or still growing and not chasing low-margin business. This is, though, plainly a market in decline, consumption falling annually by a couple of per cent across the world.
Those sales numbers came in a bit below forecasts, though this is of no concern because City expectations for the year will be met. The main miss came from the continuing chaos in Syria and Iraq, which meant the numbers for those growth markets undershot. If you take out the US acquisition, which outperformed, underlying sales across the group were down by 9 per cent or so.
This reflects Syria and Iraq, the refusal to pursue low-margin business in Turkey and Ukraine and a general loss of market share to lower cost producers. Imperial is doing all the right things, cutting £300 million off costs, £55 million this year. That American deal was an unlooked-for boon, and little further industry consolidation can be expected in the short term.
Advertisement
Meanwhile, it is returning cash to investors, pledging dividend rises of at least 10 per cent a year, the rate of increase of the halfway payment. The shares, off 30p at £37.10, have been strong performers along with other high-income stocks, and the traditionally high yield is now 4.2 per cent. Existing investors should hold, but there is better income elsewhere on the market.
MY ADVICE Avoid for now
WHY Tobacco companies have traditionally been good income stocks if in a declining market, but share price rise has eroded that dividend yield
JD Wetherspoon
The usual tug of war between Tim Martin at JD Wetherspoon and the City continues. To recap, the founder of the successful pub chain would prefer to see business coming in through the doors at acceptable margins rather than jack up prices. City analysts want to see margins where they are at other pub chains — that is, rather higher.
Mr Martin counters this by using the company’s cashflow to buy back the shares, so supporting the price. He announced another £60 million maximum of potential buybacks in the next financial year yesterday. This would have the effect of pushing his personal holding above 30 per cent. He has no intention of taking the company private, and we have been in this situation before and it can be resolved.
I am with Mr Martin on this. Wetherspoon’s is a unique business, and there seems little point in diluting this uniqueness and following the crowd. Those City doubts have done the share price little good, though it added 20½p to 700p on third-quarter numbers that were up with expectations. The company is slightly slackening off the pace of new openings and has raised prices a bit, though only in line with the market.
Advertisement
JD Wetherspoon has tended to buck downturns in consumer spending in the past. Those price rises contributed to a 3.8 per cent rise in like-for-like sales over the 13 weeks to April 24. The shares sell on 16 times earnings, which does not suggest much immediate upside, though I like the Wetherspoon story long term.
MY ADVICE Avoid for now
WHY City scepticism could hold back the price
Royal Dutch Shell
Any company paying out £2 for every £1 of earnings that comes in the door is going to have to cut its dividend, and fast — especially if those shares are yielding 7.5 per cent. Except if that company is Royal Dutch Shell. It is too late to argue over whether Shell should have launched an offer for BG Group back in spring last year. The low oil price means that dividend payments at their current level are going to remain uncovered by earnings for the appreciable future. It should only be a question of when Shell buckles, and cuts the payment, then.
Except that capital spending is heading downwards towards $30 billion this year, which means that the number will be little changed on last year even with the extra BG capex taken on, and will fall further. Savings from the deal are above expectations.
There are $30 billion of disposals to be trickled out by 2018. It is possible to construct a scenerio in which there is all the above and a rising oil price meaning that the dividend is covered again. Or one that suggests the alternative. No one knows, and Shell will continue to maintain the dividend for as long as it can. That makes the shares, off 39p at £17.22½p, worth having.
Advertisement
MY ADVICE Buy for income
WHY That yield is among the best on the market
And finally . . .
I wrote a couple of months ago about the purchase by Avingtrans, an AIM-quoted engineer, of the Rolls-Royce pipe manufacturing business, which supplies the company’s aero-engines. Now, in an unusual move, the company has agreed to sell its aerospace division, into which the Rolls-Royce business was folded, to a private equity firm for £52 million. This will leave Avingtrans with net cash of £47 million, or about equivalent to its market capitalisation, and some of the money will be returned to investors.
Follow me on Twitter for updates @MartinWaller10