Rising Regulation And Illicit Trade Will Erode Tobacco Revenues

Key Takeaways

• Long-term decline in tobacco and regulatory pressures will steadily erode core revenues and compress margins, particularly in mature markets.
  
• Heavy reliance on pricing power and insufficient innovation in next-generation products threaten future growth and risk falling behind more adaptive competitors.
  
• Strategic pricing, diversification into reduced-risk nicotine products, and disciplined capital management underpin operational resilience and shareholder value amid industry volume pressures and economic uncertainties.

Catalysts

Manufactures, imports, markets, and sells tobacco and tobacco-related products in Europe, the Americas, Africa, the Asia, Australasia, and internationally.

• Despite recent market share gains and robust pricing power, ongoing global health awareness and intensifying anti-smoking regulations are expected to drive a long-term decline in smoking rates and further restrict marketing, which will steadily erode Imperial Brands' core combustible tobacco revenue and compress operating margins in most major geographies.
  
• While the company reported double-digit net revenue growth in next-generation products (NGP) and claims progress in scaling NGP brands like Zone and blu, there remains a high risk that Imperial Brands will lag more innovative competitors as consumer preferences among younger generations shift decisively away from traditional tobacco and even established NGP formats, limiting revenue diversification and future earnings growth.
  
• The rise of illicit tobacco trade, especially in high-excise markets such as Australia and parts of Europe, will likely intensify as governments impose further taxes and restrictions, undermining Imperial Brands' legal volume sales, eroding market share, and posing a structural headwind to net margins.
  
• Persistent concentration of earnings in mature, declining markets such as the UK and Europe makes Imperial Brands increasingly reliant on price increases to offset shrinking volumes, ultimately constraining top-line growth and creating long-term earnings headwinds once pricing elasticity is exhausted.
  
• Continued prioritization of dividends and share buybacks over investments in research and development or strategic acquisitions, compounded by already high relative debt levels, will diminish Imperial Brands' ability to adapt rapidly, potentially reducing future net margins and placing dividend sustainability at risk if industry disruption accelerates.

Imperial Brands Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Imperial Brands compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Imperial Brands's revenue will decrease by 23.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 13.9% today to 25.7% in 3 years time.
• The bearish analysts expect earnings to reach £2.1 billion (and earnings per share of £3.54) by about August 2028, down from £2.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.5x on those 2028 earnings, up from 9.4x today. This future PE is lower than the current PE for the GB Tobacco industry at 19.9x.
• Analysts expect the number of shares outstanding to decline by 0.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.31%, as per the Simply Wall St company report.

Imperial Brands Future Earnings Per Share Growth

Risks

• Imperial Brands' track record of consistent market share gains in core markets such as Germany and the U.S., combined with strategic price increases, demonstrates resilience in both topline revenue and operating profit even as overall industry volumes decline.
  
• The company's growing strength in next-generation products-including double-digit revenue and market share growth across vapor, heated tobacco, and modern oral segments-positions Imperial Brands to capitalize on secular shifts toward reduced-risk nicotine alternatives and support long-term revenue diversification.
  
• Robust capital allocation, including an evergreen share buyback program and progressive dividend increases, provides ongoing support to earnings per share and enhances shareholder returns, particularly given the strong free cash flow generation and disciplined balance sheet management.
  
• The firm's pricing power in the face of volume declines, together with its comprehensive product portfolio covering all price points across priority markets, continues to underpin stable operating margins and helps mitigate the impact of consumer downtrading or economic uncertainty.
  
• Sustained investment in talent, data-driven culture, and organizational agility-alongside a proven management continuity and strategic transformation roadmap-enhances the likelihood of maintaining operational efficiency, cost control, and ongoing improvements to net margins over the next strategic cycle.

Valuation

• The assumed bearish price target for Imperial Brands is £24.21, which represents two standard deviations below the consensus price target of £32.23. This valuation is based on what can be assumed as the expectations of Imperial Brands's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £39.0, and the most bearish reporting a price target of just £24.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £8.3 billion, earnings will come to £2.1 billion, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 8.3%.
• Given the current share price of £30.11, the bearish analyst price target of £24.21 is 24.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.