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Imperial Brands' 8% yield lures Saracen's Campbell

Fund manager ramps up stake in high-yielding tobacco company, whose shares have lost more than a third of their value over the last year.

 
Imperial Brands' 8% yield lures Saracen's Campbell
 

Global fund manager Graham Campbell has ramped up his stake in Imperial Brands (IMB), as the shares' continued slump sends them towards the top of the FTSE 100's yield league table.

The cigarette maker's shares have lost more than a third of their value over the last year, placing the shares on a trailing yield of around 7%. Among FTSE 100 stocks, only utility companies SSE (SSE) and Centrica (CNA) yield more, at 7.2% and 8.2% respectively.

But Imperial Brands' policy of raising its dividend by 10% a year means the shares' forward yield, which estimates payouts over the forthcoming year, is even higher, at around 8%.

Shares in Imperial have drifted amid fears the tobacco company is trailing rivals in the development of 'next generation' products like heat-not-burn devices.

A lack of exposure to emerging markets has also weighed, while tobacco stocks, viewed by some as 'bond proxies' due to the reliability of their dividends, have come under pressure following the sell-off in the bond markets.

Campbell, manager of the £119 million Saracen Global Income and Growth fund, said Imperial Brands had been a weight on the fund's performance this year, but that he was looking to take advantage of the shares' cheapness.

'Imperial Brands has been our worst performing stock so far in 2018, and now looks anomalously priced,' he said.

'It has been a perfect storm for the company recently as the combination of rising bond yields, sterling strength and concern over the company’s exposure to next generation products has led to the shares de-rating to a current year price-earnings ratio of only 8.4 times.'

Campbell (pictured) conceded Imperial's dividend growth policy was unsustainable, but believed that even at the current high level 'the dividend can easily be maintained'. 

'Indeed, we would encourage management to stop growing the dividend and use free cash flow to buy back their own shares,' he said.

'We suspect that if the current management team prove incapable of delivering shareholder value, an activist investor or even another corporate will get involved.'

Campbell argued that while the stock had been out of favour with investors, Imperial Brands was 'a solid business that enjoys strong margins and is very cash generative'.

Imperial has long been a favoured stock among fund managers. the cigarette maker remains Neil Woodford's largest holding, representing 6.8% of his £7.1 billion Woodford Equity Income fund.

But Terry Smith is one star fund manager to have turned against the stock. Citywire AAA-rated Smith sold his stake from his Fundsmith Equity fund last year, citing the company's lack of exposure to next generation products and the developing world.

Campbell's ramping up of his stake has lifted Imperial Brands to a top five position in his fund. He has funded the purchase with the sale of his stake in Spanish IT company Amadeus (AMS.MC), another stock he shared with Smith. 

Campbell had been invested in Amadeus since 2014 but while he hailed the company's 'attractive business model' and 'very healthy margins', he said the shares had become too expensive.

'The shares have more than doubled since purchase as the shares have rerated on a significantly higher earnings number,' he said.

'With the shares now trading on 24 times current year price earnings ratio and yielding less than 2%, we now view the risk-reward as unattractive and have sold our shares.'

Saracen Global Income and Growth has outperformed the Investment Association Global Equity Income sector average over three and five years. Over five years it has returned 51% versus 46.2% for the sector, and over three years has delivered 23.3% against 21.4% for the sector.

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