Imperial Brands: Raising Fair Value Estimates on More Gradual Tobacco Decline

Key Morningstar Metrics for Imperial Brands

• Fair Value Estimate
  : £33
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

Tobacco remains Imperial Brands IMB' main value driver at 96% of fiscal 2025 tobacco and next-generation products (NGP) net revenue. Tobacco volume declines moderated last year, as Imperial’s value brands benefited from trade-down. Meanwhile, NGP revenue is nascent but rapidly growing.

Why it matters: Imperial lags its peers in NGP due to its fast-follower strategy. Thus, its tobacco business is far more important to the intrinsic value than it is to others. We think trends support a slower tobacco decline that should allow Imperial to maintain its robust free cash flow.

• Given the continued economic headwinds facing consumers, we think trade-down will continue to help moderate tobacco volume decline in the medium term. We forecast a less than 4% average decline over the next five years as compared to 5% over the previous five.
• Longer term, while NGP remains a minor contributor, it should be enough to add about 40 basis points per year in total company revenue growth. We forecast NGP revenue to grow more than 8% per year compared to 1% growth in tobacco revenue.

The bottom line: As we wait for wide-moat Imperial Brands to announce first-half fiscal 2026 earnings, we’ve raised our fair value estimates to £3,300 per USD 44 from £3,000 per USD 39. The increase stems from a more gradual decline in tobacco volume and the time value of money.

• Imperial’s shares are fairly valued after taking into account our Morningstar Medium Uncertainty Rating, with most of the sector also in a fairly-valued range. The tobacco sector looks particularly appealing to investors given the economic headwinds facing other consumer staples industries.
• Shareholder distributions remain a central part of Imperial’s capital allocation strategy. We think the company can raise its dividend 5% per year and repurchase nearly £2 billion of shares per year over our forecast period.