7

I noticed that tobacco companies pay huge dividends. For example Imperial Brands is expected to pay 12.22%. I can see that a tobacco company would want to pay some dividend because it operates in an old sector, is likely old, and there might not be much else to conquer without leaving the sector the company is good at operating in.

But tobacco company's stocks are declining in value. As public companies are controlled by their shareholders, to me that behavior means that interest in their products is waning and they feel like they should scale back their operations and instead cash out, basically selling off the entire company.

But I don't see interest in cigarettes waning. Lots of people smoke and vaping is taking off. Given that some of those companies already produce vaping devices (including the example company Imperial Brands) and that tobacco companies seem to be really profitable (after all, they're giving away double digits dividends), I can't see why they don't invest more to grow their operations (for example to capture more of the emerging vaping market) instead of paying out high dividends. What's their strategy?

  • 6
    But I don't see interest in cigarettes waning what data are you basing that on? – dwizum Nov 26 '19 at 19:23
  • 2
    Possible duplicate of Why does a company pay dividends at all? – yoozer8 Nov 26 '19 at 19:24
  • @dwizum Well, tbph when I wrote that only from personal observation. No one I know quit but I know a few who started smoking and many have started vaping. People in industrial countries actually seem to smoke less but China seems to be kicking up. Even the ones who are trying to tell you that everyone is quitting are failing to do so. Vaping is on a rise for sure. – UTF-8 Nov 26 '19 at 20:51
  • 1
    @yoozer8 It's not a duplicate of that question and my question's second sentence is a strong indicator of this circumstance. – UTF-8 Nov 26 '19 at 20:53
  • 1
    I think the specific question is why do they page huge dividends, not pay dividends in general. like why do reits pay higher dividends? or why do oil companies pay higher dividends? or why do retailers pay lower dividends? I think he is asking why the general tobacco market has higher dividends than average. – rhavelka Nov 26 '19 at 22:13
6

Large dividends can be caused by a few different reasons, one of them could be poor outlook for the stock despite steady profits and dividend payouts. The yield is high because of a depressed stock price. Alternatively, the high dividend could be being used by the board of directors to encourage institutional ownership.

Corporations are dynamic things, and just because their core industry is dying does not mean that the company will not be wildly profitable in the future. Intuit is a company that keeps reinventing itself to stay relevant. After Quicken became obsolete, they moved into other parts of FinTech to remain profitable. Conversely, the company KayPro made great portable computers prior to Microsoft and Intel but died, missing out on the PC boom when they should have been able to dominate it.

What happens if cannabis becomes 100% legal, even for recreational use. Could these tobacco companies scoop up these small time players and run the operations more efficiently? Probably. Could they provide a better product then the existing vaping companies? Maybe.

People have been counting the tobacco companies dead since the late 1980's when they were held liable for several class action suits. However, they still keep trucking.

Keep in mind that the verdict is still out on vaping. One women's health provider, I know, tells her pregnant patients that she would rather have them smoking then vaping. Her justification for this position is that there is no research on the effects of vaping and a fetus. What happens to vaping if emissions from the heating coils is linked to brain cancer in both the smoker and fetus? What happens if Imperial Brands purchases a vaping company that provides a new type of machine that is clinically proven to offer no adverse side effects?

It is very hard to predict the future.

Have you looked at Imperial's annual report? They probably talk about their justification for high dividends and their strategy there.

|improve this answer|||||
  • From their annual report it seem to me that they did make profit but are paying out more in dividends. They get that money by selling shares of tobacco products in the U.S. and of a European distributor. Given only that, I'd think they're scaling back operations. But I didn't think about cannabis. Combined with that, their strategy seems to make sense. Legalization of cannabis is gaining traction in the western world, especially in the U.S. So it makes sense that they're reducing their tobacco stuff in the U.S. where you'd expect cannabis to rise first. – UTF-8 Nov 26 '19 at 21:21
  • Their annual report actually talks a bit about cannabis. They seem to be heavily on the vape / e-cigarette train. The title page of their annual report is a guy smoking an e-cigarette, so it's still a bit surprising to me that they're not selling tobacco stuff to buy more e-cigarette stuff / invest more in their own e-cigarette operations. It could be explained with uncertainty as you did but I'll keep this question open a bit longer in case someone comes up with an even better explanation. Thank you very much in any case. :) – UTF-8 Nov 26 '19 at 21:25
  • 1
    That advice (from your aquaintance) at the end is very very strange. How would someone advice something proven harmful instead of something not proven harmful? That is just irrational. She would take a sure loss instead of a bet? She would also advice burning money over buying a lottery ticket? Opinions like those would immediately disqualify her from providing service to any of my family, on the count of being irrational, and thus liable to not give good advice... – Stian Yttervik Nov 27 '19 at 8:17
  • @StianYttervik are you a health provider? She feels strongly that vaping is more dangerous than smoking. There is no evidence, since the last time we spoke, to prove her wrong. – Pete B. Nov 27 '19 at 11:48
  • 1
    @PeteB. Well, it is this "feeling" that I took issue with. But I realize it is completely tangential to the question and was wrong of me to comment as such, and to keep commenting. Please disregard it. I was struck with one of these – Stian Yttervik Nov 27 '19 at 11:55
-1

The example company can pay more in dividends than it has in net earnings, for instance, because some of its expense is non-cash depreciation of goodwill. Of course goodwill relates to things like brand-names acquired in mergers.

The company must maintain good stock support, for instance with a high dividend payout, to be able to roll-over its debt at bond redemptions. The buyers of the bonds likely require the ability to short-sell a liquid stock of the same company. The debt-to-equity ratio of the company is about 237 to 1.

If they hire me at CEO I will carry the company additionally into caffeine-delivery-systems by distribution of refrigerated beverages. The refrigerated beverages will require very little preservatives and very little sugar and will be a unique premium product.

|improve this answer|||||

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.