On borrowed time, Imperial Brands remains extraordinarily profitable

Cigarette manufacturers' return to favor is one of the highlights of the year on the financial markets.

While Philip Morris has never really fallen out of favor with investors—see Philip Morris remains one step ahead—its two rivals, British American Tobacco and Imperial Brands, have long been viewed with suspicion.

This is because the two British groups are dealing with higher levels of debt and, above all, much slower growth in the category of so-called new-generation nicotine products—vaping, heated tobacco and chewing tobacco. See British American Tobacco p.l.c.: Still struggling.

However, both remain prodigious cash machines. As MarketScreener wrote about the last earnings report, while Imperial's share price has languished at the same level as fifteen years ago, the group's profits and dividends more than tripled in the meantime, despite a structural decline in volumes, entirely thanks to sustained price increases. 

Unsurprisingly, this trend continued in FY 2025: volumes declined by 1.7%, although prices rose by 5.4%. Momentum was the most pronounced in the US, where volumes fell by 6.1%, while prices rose by 9.9%.

Imperial thus managed to generate £2.7bn in cash profit, or free cash flow—a 5-year record. As usual, this profit was fully returned to shareholders via dividends and share buybacks. In light of these strong results, Imperial announced a further 4.5% increase in its dividend and a 16% increase in its share buyback program.

Since 2021, the group has generated a total of £11.6bn in free cash flow, an annual average of £2.3bn. These figures should be viewed in the context of an enterprise value of £35bn, equivalent to a multiple of 15x average profit over the last five years – compared with less than 8x not so long ago.

The question is how long this model will remain sustainable. The thorny issue – and one that the group's financial communications hardly emphasize – remains the very marginal share of next-generation products in consolidated revenue: they account for under 5%, illustrating the substantial gap with Philip Morris.

Imperial also has net debt of £9bn, four times its average profit over the past five years. The bond market also remains surprisingly lenient with the British group, which this year placed three dollar-denominated issues at an average rate of 5.5%, just 120bp above the ten-year rate.